UNRISD UNITED NATIONS RESEARCH INSTITUTE FOR SOCIAL DEVELOPMENT

Country Study: Malaysia

POLICY REGIMES AND THE POLITICAL ECONOMY OF POVERTY REDUCTION IN MALAYSIA

Edited by

Khoo Boo Teik

Commissioned for the UNRISD Flagship Report on Poverty

Project on Poverty Reduction and Policy Regimes

January 2010

The United Nations Research Institute for Social Development (UNRISD) is an autonomous agency engaging in multidisciplinary research on the social dimensions of contemporary development issues. Its work is guided by the conviction that, for effective development policies to be formulated, an understanding of the social and political context is crucial. The Institute attempts to provide governments, development agencies, grassroots organizations and scholars with a better understanding of how development policies, and processes of economic and social change, affect different social groups. Working through an extensive network of national research centres, UNRISD aims to promote original research and strengthen research capacity in developing countries. Research programmes include: Civil Society and Social Movements; Democracy, Governance and Well-Being; Gender and Development; Identities, Conflict and Cohesion; Markets, Business and Regulation; and Social Policy and Development. A list of the Institute’s free and priced publications can be obtained by contacting the Reference Centre.

UNRISD, Palais des Nations 1211 Geneva 10, Switzerland

Tel: (41 22) 9173020 Fax: (41 22) 9170650

E-mail: info@unrisd.org Web: http://www.unrisd.org

Copyright © United Nations Research Institute for Social Development (UNRISD). This is not a formal UNRISD publication. The responsibility for opinions expressed in signed studies rests solely with their author(s), and availability on the UNRISD Web site (www.unrisd.org) does not constitute an endorsement by UNRISD of the opinions expressed in them. No publication or distribution of these papers is permitted without the prior authorization of the author(s), except for personal use.

POLICY REGIMES AND THE POLITICAL ECONOMY OF POVERTY REDUCTION IN MALAYSIA

Edited by

Khoo Boo Teik

TABLE OF CONTENTS 1 Political economy of poverty eradication in Malaysia: An overview

Khoo Boo Teik and Khoo Khay Jin 1 2 Development Strategies and Poverty Reduction Khoo Boo Teik 25 3 Poverty and inequality Khoo Khay Jin 73 4 Welfare Regime, Social Protection and Poverty Reduction

Saidatulakmal Mohd 115 5 Welfare Regimes, Social Services and Poverty Reduction

Halim Salleh 148 6 Organized Groups, Development Strategies and Social Policies

Francis Loh Kok Wah 206 7 Developmental State Capacity and Institutional Reform

Abdul Rahman Embong 245

1

CHAPTER 1

Political economy of poverty eradication in Malaysia: An overview

Khoo Boo Teik and Khoo Khay Jin

The origin of this book lies in a Malaysia country study that was commissioned by the United Nations Research Institute for Social Development (UNRISD) for its project on Poverty Reduction and Policy Regimes. Since the study, comprising six reports, draws its research framework from the Project Proposal which, additionally, laid out its theoretical perspective and key concerns with admirable lucidity, it might be instructive at the outset to provide a liberal précis of the Project Proposal.

In setting out its point of departure for the study of poverty reduction (comprising lengthy studies of eight countries, supplemented by shorter reports of others), the Proposal makes the following significant observations:

• It is crucial to develop a coherent and consistent framework for connecting discussions of poverty and its reduction to strategic links among different dimensions of development, including governance, economic growth, stabilization, and security.

• Policy recommendations should draw substantially from the ideas, theories and experiences available from more successful records of poverty reduction, notably those attained by the Nordic late industrializers and the East Asian developmental states.

• It is necessary to go beyond ‘measuring things that people lack’ without ‘understanding why they lack them’ by investigating such aspects of poverty as ‘self-reinforcing vertical and horizontal inequalities’, and the impact of orthodox macroeconomic policies and the inequalizing tendencies of market forces on these inequalities.

• Equity being an integral component of poverty reduction, it is necessary not to isolate social policy from economic policy, but to analyse the macroeconomic policy and growth strategy that should be pursued in tandem with ‘poverty alleviation’ social policy.

• The notion of ‘participation’ in current poverty reduction strategies, stresses process rather than substance. By restricting the agenda of participation to empowerment at the micro level without tackling disempowerment or exclusion at the macro level, the notion ignores the dilemma that poverty is lived at the micro level but its reproduction, intensification or amelioration depend crucially on macro-level policies.

2

• A narrow focus on ‘poverty’ may be misleading since it assigns a residual role to social policy that is regarded merely as an instrument to correct some of the negative outcomes of macroeconomic policies.

I. Policy regimes: UNRISD research framework1

Guided by these observations, which incorporate its criticisms of certain approaches to poverty reduction, the Proposal adopts a ‘policy regime’ framework to examine how a ‘triad’ of social policy, economic policy and the political/institutional context affects the record of poverty reduction not merely in developing countries but developed ones, too.

Central to the concern with social policy is a recognition that the issue of equity should be restored as a critical aspect of economic policy analysis instead of maintaining, Washington consensus like, that governments did not require redistributive pro-poor policies but only ‘good policies’ ensuring high growth rates that would alleviate poverty by raising the income levels of the poor without changes to income distribution. Moreover, the Proposal suggests that poverty reduction is most effectively addressed by universalistic policies (rather than targeting approaches) although issues of prioritization, sequencing and instruments will have to be decided by a country’s initial conditions, resource endowments, position in the global economy, and the constellation of socio-political forces operating at the national level. Besides, in an era favouring privatization, rolling back the state, and a central role in the development process to the private sector and the market, it is crucial to examine the regulatory capacity of the state, the accessibility and affordability of privatized services, and the role of business in social protection. Finally, there is the issue of labour markets, which, although crucial in strategies to combat poverty and politically difficult manage under late industrialization, face pressures for deregulation and liberalization that discard former policy emphases on full employment, minimum wage legislation, and labour rights.

Two broad issues feature prominently in the stress on economic policy and its relationship to poverty. The first, regarding growth and stabilization, underscores the need for research on macroeconomic policies that support the redistributive and growth requirements of poverty eradication strategies. A major ingredient of strategies for the eradication of poverty is economic development that involves economic growth and structural changes. Growth has come to be seen as the derivate of stabilization and structural adjustment measures. Yet many policies designed to address these concerns are at variance with poverty eradication since some economic growth patterns accompanied by growing inequality may negate any potential pro-poor effects of growth. In particular, deflationary policies aimed at stabilization may undermine growth itself. In addition, fiscal policy – including public expenditure and ways of financing it – cannot be detached from development and social policy; instead fiscal policy must be accepted as influencing distribution and production and, therefore, poverty reduction. This view is quite opposite to a position of reducing fiscal policy to being the handmaiden of monetary policy that, 1 This section is drawn from UNRISD (2005: 2–3).

3

primarily concerned with stabilization, sees public expenditure as crowding out the private sector and regards taxation as a disincentive to private investors.

The political and institutional context for planning and implementing poverty reduction raises several important questions. For instance, how much ‘voice’ do the poor have in various policy regimes? What is their organizational strength? What are the impediments to their participation in politics? What is role of the multiplicity of identities of the poor when pursuing their economic interests qua poor? How are they affected by political arrangements that shield key economic decisions from politics sometimes in the name of protecting the poor from rent-seeking elites? In this regard, while a frequently highlighted feature of current poverty eradication strategies is the prominent role given to civil society non-governmental organisations (NGOs), yet NGOs have not played a central role in any successful case of poverty eradication. Indeed, the social movements that constructed ‘social pacts’ or formed the backbone for poverty eradication in the past differ substantially in form and programmatic focus from today’s NGOs. Social policies in the East Asian model, for example, were overwhelmingly introduced top-down by those in power. The elites heeded popular demands because geopolitics made them attentive to the radical discourses of regimes in neighbouring countries and forced the former to use social policies to pre-empt radical movements. To that extent, state capacity and institutional reform are critical whatever the character of the state because democratic and authoritarian regimes have both played a ‘developmental’ role in successful cases of fighting poverty. However, many present policies presume the demise of the ‘developmental state’ as reality and as aspiration, associate many of its institutions with failed strategies of industrialization, or condemn them for being ‘market distorting’, ‘interventionist’, clientelistic, and fiscally unsustainable. The state is expected to be ‘regulatory’, stripped of many of the instruments available to developmental states. In many cases, the state is principally expected to ensure a ‘level playing field’ and the protection of property rights such that dismantling developmental institutions is considered to be the sine qua non of effective policy reform and adjustment.

In summary, the Proposal’s ‘policy regime’ framework offers a coherent and systematic way to examine the role of institutions in poverty reduction and the effectiveness of reforms currently associated with good governance. It pays particular attention to institutions that underpin the policies of different ‘policy regimes’ and the ways that processes of institutional reform are shaped by path dependence, and local and national contexts. To that extent, the research may answer the pressing question, ‘How “portable” are such institutions?’

II. Growth and development in Malaysia: an overview

The political economy of Malaysia, no more and no less than that of any other

country, may be expected to illuminate many issues and dimensions of socio-economic development, including, generally, the formulation and implementation of economic policies, the efficacy of development planning, the maintenance of specific growth trajectories, the construction of state-market relations, the management of social

4

inequalities, etc. The choice of issues naturally depends on the core concerns and vantage points of analysis. Here, since this book grew out of the UNRISD’s project on Poverty Reduction and Policy Regimes, the overall analysis explores how poverty reduction has been attempted and achieved in Malaysia as a consequence of particular paths of socio-economic development that were taken, guided and bounded by various policy regimes. Around such a focus, Malaysian political economy since Merdeka (independence) from British colonial rule on 31 August 1957 provides an instructive example in three fundamental ways, each of which was, moreover, fraught with complexities.

First, the national economy is one of the rare successes of post-colonial

capitalism. In developmental terms, the economy has sustained high levels of economic growth and recorded meaningful degrees of structural transformation. Consequently, Malaysia has progressed from being one of many lowly, commodity-producing, underdeveloped countries to being one of the much vaunted East Asian newly industrializing economies, or what the World Bank once categorized as ‘high performing Asian economies’. Its strategies of economic growth and structural transformation were bound up with many other matters such as policy initiatives, modifications, turnarounds, and discards; internal institutional capabilities and weaknesses in planning and administration; changes in the balance of power between state, capital and labour; periodic alterations in the interfaces between the national and global economies; and even the impacts of largely fortuitous events that happened from time to time.

Second, the Malaysian state’s decisive conceptualization and unbroken

implementation of a vast social engineering project reduced the incidence of poverty from the high levels of its moment of decolonization to much lower levels three decades later. One critical objective of the social engineering project, officially promulgated in 1971 as the New Economic Policy (NEP), was ‘poverty eradication’ (to use official terminology) that was integrated into a series of economic plans long before development planning for poor countries was required to incorporate more limited ‘poverty reduction strategy papers’. Born of political crisis in 1969 and thereafter inseparable from public controversy, the NEP came to serve as the cause and effect of the transformation of the state from being relatively laissez faire to being highly interventionist. The state’s intervention in many socio-economic sectors relied on and justified the deployment of hugely increased public financial resources for economic, social and welfare development. At the same time, economic intervention catalysed an enormous expansion of the state’s technocratic capability and bureaucratic control of the economy that were subsequently regarded as limiting factors in further economic advance.

Third, bequeathed a legacy of a multiethnic society, and formed by a history of

political struggles that culminated in a peculiar configuration of interethnic power-sharing, the state implemented economic development and poverty reduction as a national project that was indispensable to long-term ‘national unity’. In practice, and however imperfectly, the state pursued (economic) growth with (social) distribution in parallel with a determined (political) management of the tensions so often endemic to a colonially constructed plural society that bore a rigid ethnic division of labour. Yet, the pursuit of rapid growth with equitable distribution demanded an ambitious juggling of

5

class interests and ethnic expectations – akin to what are politely if crudely called vertical and horizontal inequalities – that risked being pulled in conflicting directions. In time, the juggle was dominated by competing coalitions of class interests and political power whose rent-seeking activities violated ‘good governance’. In lean times, the painful short-term choices that were made ‘between growth and distribution’ were amenable to political manipulation that exacerbated ethnic anxieties and inter-ethnic rivalry.

In all these matters, a critical role was reserved for coherent development

planning that required the imagination, resolve and, indeed, the power of political leadership that made political stability the prerequisite for economic growth and vice-versa. Even so, the resultant strategies and policies, always having to be translated into practical measures and programmes, had to respond to changing historical conditions. Favourable or otherwise, those conditions largely lay beyond the control of the state. In the half-century that spanned Malaysia’s record of development, such constraining conditions were often framed by global events and phenomena that buffeted small and non-influential states – the wave of post-World War II decolonization; the geopolitics of the Cold War and its eventual end; the emergence of a ‘new international division of labour’; the imposition of the trading and financial accords of developed states; and the reshaping of global markets under the ideological influence of neoliberalism and the impositions made by supranational agencies.

Under such conditions (and in comparable conditions elsewhere), the triad of

social policy, economic policy and the political and institutional context for development planning and execution involved choices and decisions that were informed by expert input and technocratic advice; necessarily so. Even then, they were not neutral domains demarcated by considerations of expertise and technocracy alone, however well intended. They invariably bore a deeply conflictual character that is simply but amply revealed by the perennially pressing questions: Who decides, who manages, who benefits from, and who pays for the outcomes of policy, planning and implementation? Much of this conflictual and political character of development has, of course, been explored within many areas of academic debates – for example: the relative merits of import-substituting and export-oriented industrialization; bureaucratic authoritarian states and the control of labour; the East Asian developmental states and late industrialization; the neoliberal drive towards liberalization, deregulation and privatisation; the advent and management of the East Asian financial crisis; the emergence of new regimes of governance, and so on. Or, as the UNRISD Project Proposal succinctly put it, the study of the relationships between poverty reduction and policy regimes should draw connections between three broad fields of research literature, namely development theory, welfare regimes and democratization.

In Malaysia’s case, there has always been an intuitive public appreciation of the

profoundly political character of economic development. No doubt, this is partly due to the NEP’s overarching impact on the economy, society and political system. But it is also because mass expectations were invested in development as a nationalist-capitalist project, that is, ‘a nationalist project driven by capitalist impulses or a capitalist project imbued with nationalist aspirations’ (Khoo 2003). Different leaders at different times have accordingly sought to suffuse development with strong ideological tones. In 1971,

6

for instance, Prime Minister Tun Abdul Razak, the principal architect of the NEP, characterized the NEP as striving for a ‘nationalist socialism’ that went beyond ‘state participation’ and ‘welfarism’ (Khoo 2003: 196). Two decades later, Prime Minister Mahathir Mohamad, who launched a programme of heavy industrialization and promoted privatization, proclaimed a Vision 2020 that envisaged the nation’s arrival in the club of developed countries by dint of its continued economic growth. Between the one and the other was embedded many state-supplied ideological strands and political objectives – recapitulating, as it were, Alexander Gerschenkron’s note on ideological mobilization for late industrialization – including nation-building and national unity, inter-ethnic equity at home, inclusion in an East Asian regionalist triumph, and an eventual parity with the advanced economies abroad.

What, briefly, was achieved in that broad socio-historical context?

Table 1 Economic and Social Transformation, Selected Indicators 1960–2005

1960 1970 1980 1990 2000

GDP (RM million) 5,723 (1970 prices)

12,308 (1970 prices)

26,188 (1970 prices)

79,103 (1978 prices)

210,557 (1987 prices)

Shares of GDP (%) Agriculture 40.5 30.8 22.2 18.7 12.8Manufacturing 8.2 13.4 20.5 27.0 34.7Services 41.9 45.1 42.3 49.7

Shares of total export value (%) Top 5 primary commodities 66.1 56.0 39.2 18.8 4.8Manufacturing products 8.5 11.9 22.2 60.4 85.2

Shares of total employment (%) Agriculture 55.2 53.5 39.7 27.8 16.1Manufacturing 6.4 11.9 15.7 19.5 27.5Services 32.5 37.3 45.7 47.5

Employment, Poverty Unemployment rate (%) 7.8 5.3 6.0 5.5Incidence of poverty (%) 49.3 6.8 15.0 5.1

Shares of corporate equity (%) Malay/bumiputera 1.9 12.4 20.3 19.4Non-Malay 23.5 40.1 45.9 41.1Foreign 60.7 47.5 25.1 31.8

Human Development Index (HDI) 1985 1990 1995 2000 2005HDI value 0.696 0.721 0.760 0.790 0.811

Sources: BNM (1991: 233, Table 8.4); Jomo (1990: 43, Table 3.4; 79: Table 4.1); Malaysia (1965: 23–24, Table 2-2; 35, Table 2-10); Malaysia (1971: 40, Table 3-1); Malaysia (1973: 28, Table 2-3; 83, Table 4-7); Malaysia (1981: 33, Table 3-1; 18, Table 2-3; 81, Table 4-6; 176, Table 9-7); Malaysia (1986: 99, Table 3-4); Malaysia (1991: 14, Chart 1-5; 20, Table 1-2; 28, Table 1-7; 32, Table 1-8); Malaysia (1999: 41, Table 2-3; 67, Table 3-1; 80-81, Table 3-5; 89, Table 3-9; 208, Table 7.1); Malaysia (2003: 32, Table 2-3; 61, Table 3-2; 65, Table 3-5; 95, Table 4-2; 204, Table 7-3); UNDP (2007/2008: 235)

As the selected indicators (of economic and social transformation) in Table 1 suggest, the movement from initial postcolonial conditions to the current levels of statist

7

aspirations broadly entailed two kinds of achievement. The economy underwent a structural shift usually associated with a transition from an agrarian to an industrial society, as may be seen from the changing shares of the agricultural and manufacturing sectors in their respective contributions to Gross Domestic Product (GDP), the total value of exports, and total employment. For instance, between 1960 and 2000, the agricultural sector’s share of GDP declined from 40.5 per cent to 12.8 per cent, while the contribution from manufacturing rose from 8.2 per cent to 34.7 per cent. Economic transformation was accompanied by major social changes, including those peculiar to Malaysian society. Arguably the most important of these changes was the post-1969 record of poverty reduction guided by the NEP. The ‘Outline Perspective Plan 1971–1990’ of the Mid-Term Review of the Second Malaysia Plan 1971–1975 had expressly set a target for reducing the incidence of poverty from 49 per cent of all households in 1970 to 16 per cent in 1990. The first post-1990 five-year economic plan, the Sixth Malaysia Plan 1991–1995, gave an official 1990 poverty rate of 17.1 per cent (Malaysia 1991: 32, Table 1-8). By 2004, however, according to the current Ninth Malaysia Plan 2006–2010, the incidence of poverty had fallen to 5.7 per cent of all households (Malaysia 2006: 329, Table D), a rate that was projected to be halved by 2010 (Malaysia 2006: 340). A rough indication of the overall economic position is provided by Malaysia’s estimated PPP-adjusted GDP per capita of US$10,318 in 2005 (Malaysia 2006: 6).

Bolstered by this experience of development, then Prime Minister Mahathir Mohamad was led to proclaim in 1991 that if Malaysia built on its past 20 years of economic growth, the nation would attain ‘developed country status’ by the year 2020 (Mahathir 1991). This bold statement of a national goal, soon popularized as Vision 2020, was something of an ideological breakthrough for a society that had long regarded itself and been regarded as a member of the world of developing countries. Mahathir’s Vision 2020, which the present administration (under Abdullah Ahmad Badawi who became Prime Minister in November 2003) still claims as its ‘mission’, seemed to leave behind a period when newly independent Malaya was more or less a typical postcolonial, middle-income commodity producer. Even after Malaysia was formed in 1963 by the merger of Malaya with Singapore, Sarawak and Sabah (but with Singapore seceding in 1965), the economy was dependent on commodities, trade and limited import-substituting industrialization (ISI). The 1970s saw the progress of an active programme of export-oriented industrialization (EOI), based on the labour-intensive manufacture of textiles, garments and electronic products, that was led by multinational corporations (MNCs) and enthusiastically promoted by the state. The EOI has remained crucial to the economy despite its persisting dependence on foreign direct investment (FDI). In the early 1980s, the state launched a drive towards heavy industrialization (HI) within the automobile, cement and steel sectors but without achieving the performances the state had hoped to attain. Beginning with the late 1980s, however, a decade of high export-oriented and manufacturing-led growth, averaging over eight per cent annually, helped transform Malaysia into a newly industrializing economy (NIE), leading Mahathir to speak confidently of the future in strategic planning terms.

At the core of this record of economic transformation and poverty reduction lie

complex combinations of national developmental strategies, state-led social engineering,

8

national and global market forces, social pressures, and institutional changes (taking place at many levels of the state). Some parts of those combinations led directly to the design and implementation of innumerable measures and programmes of ‘poverty eradication’ since 1970. Others exerted their impacts, planned or fortuitous, on the progress or retreat in poverty reduction at different times, depending, for instance, on whether there was high growth or economic recession. III. NEP: a political economy of poverty eradication2

To trace and explain those combinations, their dynamics and their consequences in Malaysia, this book undertakes what may be regarded as a political economy of ‘poverty eradication’ in which the NEP occupies a central position. The NEP clearly was not and could not be everything even if many matters were readily attributed to or claimed for it. Yet no critical appreciation of Malaysian political economy is plausible without some knowledge of it. Hence, for readers who are not familiar with its deep and pervasive reach, a review of the NEP is offered at this point that has the additional advantage of permitting subsequent chapters in this book to connect the NEP to their arguments without repeating its basic points.

The NEP was officially launched in 1971 and ended in 1990. However, its

successor variants – the National Development Policy 1990−2000 (NDP) and the National Vision Policy 2000-2010 (NVP), and, with the prime ministerial transition in November 2003, the re-framing of the National Vision Policy as the New National Agenda (NNA) – continue to cleave to the core planks of the NEP.3 Formulated in the aftermath of the ethnic violence of 1969, the NEP drew from one major explanation for the violence, namely, interethnic disparity, principally between the Malays and Chinese, but further inflected as a disparity between indigenes and immigrants (and their descendants). At the same time, substantial poverty was recognized to be a contributory cause. Conveniently, the distribution of poverty dovetailed with the interethnic disparity argument since both poverty and Malays were predominantly rural. To forge a broad consensus, the major explanation for the violence translated into a two-prong strategy to avert its recurrence – ‘to eradicate poverty irrespective of race’, and ‘to restructure society to abolish the identification of race with economic function’. These were respectively abbreviated to ‘poverty eradication’ and ‘restructuring’.

Programmatically, this two-prong strategy was to be achieved via growth with

redistribution. In policy terms, the NEP established:

2 This overview of the NEP is drawn from Khoo Khay Jin (2008: 2–7). 3 Jomo (2004) provides a detailed summary and Shireen (1998: Ch 1) a more extensive discussion. Maznah (2005) argues that the NEP effectively ended in the mid-1980s and that the NDP signalled a further departure. It is true that the Sixth Malaysia Plan, 1991−1995, announcing the NDP, did not have a chapter on distribution and re-structuring; but the objectives were stated up front in the first chapter in the same terms as previously. The Mid-Term Review of the Sixth Malaysia Plan again had a chapter on distribution and re-structuring with the same headings as previously.

9

i. a target of 30 per cent Malay and other bumiputera4 (indigene) ownership of share capital by 1990, to be achieved by requiring all new issues and firms growing beyond a certain size to set aside the requisite proportion, through assistance to establish firms, government-established unit trust funds, government acquisition and transfer, and, in a later period, the privatisation of state-owned enterprises

ii. quotas for employment in the modern sector in line with the ethnic composition of the population

iii. ethnic quotas for admission into tertiary education, particularly for professional fields of study

iv. price and other forms of discrimination in support of Malay and other bumiputera businesses, and,

v. schemes for poor households, particularly those engaged in agriculture, by means of price supports and subsidised inputs5

Of course, it was more than possible to account for the raw facts of the disparities, including the distribution of income and wealth, at the time (and subsequently) in other than ethnic terms.6 However, the historically formed political economy, and the political evolution and alignments leading up to and beyond independence, which mirrored political subjectivities, probably made it impossible to account for the disparities in other terms without what would have amounted to a virtual revolution, or minimally a major political re-alignment. Such a re-alignment had been rendered impracticable by the defeat of the nationalist left and the repression of the labour movement, initiated by the colonial power and continued by the post-1957 government. Subsequently, the opportunities created by the NEP, particularly for the Malays, practically ensured the marginalisation of the left, and entrenched political subjectivities and alignments.7

Whatever the controversies about the NEP, these facts remain: aside from relatively minor incidents, there has been no significant outbreak of collective inter-ethnic violence since 1969, and Malaysia has become one of the few success stories of capitalist development in the former colonial territories.8 It has achieved this while managing a social interethnic transformation within a generation, the scale of which is probably without parallel in the world. In 1970, the rate of urbanisation was 27 per cent; by 2000, it was 62 per cent. In 1970, 52 per cent of the labour force was engaged in the agricultural sector, and this was predominantly Malay; by 2000, only 14 per cent was thus employed, although it was still predominantly Malay and other bumiputera. Meanwhile, the corresponding figures for manufacturing grew from 8 per cent to 22 per cent.9 Finally, this transformation was attained with a broad and significant raising of living standards:

4 In practice, the focus was on Malays, with the other indigenes often complaining of being left aside, or included as an afterthought. 5 A succinct summary can be found in Zainal (2005). But see also Ishak (2000) and Shireen (1998). 6 The major work on income distribution at the time of the riots (Anand, 1983) represents one such argument. He argued that the facts of income distribution could be better accounted for in terms of what may broadly be termed “class”, rather than ethnicity, given the relatively small contribution of ethnicity in accounting for the income disparities; see, below. 7 However, this apparently has begun to shift with the March 2008 elections. 8 A convenient summary of this success can be found in Leete (2007). 9 These figures are derived from the respective population censuses.

10

GDP per capita in 1993 PPP$ rose from $1,122 in 1975 to $8,927 in 200010 while the incidence of poverty was reduced from almost 50 per cent of households11 in 1970 to well under 10 per cent in 2000.

Nevertheless, such a policy can and has created a constituency, especially an elite constituency, having an interest to entrench it, thus resulting in elite policy capture that directed benefits upwards rather than downwards in the social hierarchy. The policy terms can be incessantly permuted, especially if parity is narrowly defined. This has arguably happened with the restructuring objective and wealth distribution, to the detriment of income distribution issues that impact more widely and, potentially, lower down the social hierarchy. The result is a type of path dependence that continues an adherence to a policy after its usefulness may have been exhausted.

Occupational restructuring was pitched to ethnic proportions in the population. At the lower end of the occupational hierarchy, such proportions were broad-brushed and more or less directed sectorally, other than in agriculture and at the broad occupational level. In fact, the occupational restructuring was relatively easily attained within the export-processing zones that were established in the context of the global re-organisation of capital through off-shoring. That may have been the single most important means of poverty reduction as it drew large numbers of the population out of agriculture and the rural areas, the principal loci of poverty.

At the higher end, the orientation was more narrowly targeted, with specific attention to the ‘registered’ professionals,12 that is, the professions with the better remuneration, as evident from the attention and specific reporting devoted to them in all the Malaysia Plan documents. All such occupations require tertiary education in which the number of available places for the relevant fields is limited. Thus, admissions and access to these fields have been a focus of attention and a source of tension. At the same time, employment in public sector institutions such as universities and secondary schools, principally of lecturers and teachers, was tailored to boost Malay proportions. Again, these are relatively high-paying and secure jobs. Hence, there was unavoidably much discontent, albeit ameliorated by the expansion of the economy and the availability of jobs at equivalent levels of qualification in the private sector.13 The same was broadly true of opportunities and employment in the category of ‘associate professionals’ generally requiring a diploma or certificate. This latter effort, too, has been largely successful, and has even brought about an ‘over-representation’ of Malays in some areas.

The expansion of education, in particular tertiary education, has also been largely successful, but again it has not been spared considerable acrimony and inequity. Still, within a generation, the participation rates in primary education have become near universal, despite significant pockets of deprivation, while transition rates into secondary

10 In constant 1990 USD, $964 in 1970 and $3758 in 2000; derived from the UNSD National Accounts database. 11 Actual numbers vary with different sources, but the orders of magnitude are the same. 12 Under the current Malaysian Standard Classification of Occupations (MASCO), these fall within the Major Group 2 and are occupations requiring certification by a professional body such as doctors, dentists, engineers, architects, lawyers and accountants 13 This has had a paradoxical effect as the equivalent public sector jobs, while offering greater security, paid less than then private sector ones. It has also had collateral impact on quality, see, Khoo (2008).

11

education are now pushing towards near universal. Tertiary education has been the central bone of contention. Another area of contention is minority rights and claims on government support for mother-tongue education, a topic which falls outside the ambit of this book.

Restructuring was focused on asset and wealth ownership in the so-called modern sector of the economy, setting percentage targets for ownership, initially for equities and real estate and, recently,14 for commercial properties.15 This quickly presented ample opportunity for rent-seeking. Although it represented the interests of a minority – the political and economic elite and those with close connections to them – restructuring provided many chances for ethnic posturing and mobilisation, despite its not having any obvious impact on the incomes or standard of living of the vast majority of all ethnic groups, given the inevitable concentration of wealth in a capitalist economy. For an ethnically divided society, however, the ownership of wealth and subjecting wealth ownership to restructuring policies can and do have an impact on collective ethnic sentiments of equity, justice and injustice.

It has been argued that the NEP resulted in a reduced growth rate. Although this is a criticism of policy, it is essentially an empirical argument about the past. It should not be confused with possible arguments about future growth prospects related to path dependence and other ‘distortions’ resulting from the NEP, or the beneficiary elite capture of policy resulting in resistance to necessary change. It is necessary to consider whether the NEP slowed growth because the policy was in fact premised on growth with redistribution, even if in practice the redistribution requirement – encapsulated in such regulations as the Industrial Coordination Act 1975 (ICA)16 – applied not only to ‘green field’ growth but to the growth of existing entities as well. In addition, the growth of opportunities in tertiary education, especially in the desirable professional fields, could not meet the growth in demand. Thus, the restructuring requirement meant the exclusion of qualified persons not belonging to the targeted group, resulting in an outflow of talent, not to mention a heightened sense of inequity amongst groups so discriminated.

Jesudason (1989) was probably the first to contend that the NEP had a deleterious impact on economic growth, a contention that found support in the apparent reluctance of some local capitalists to invest in the early 1980s, and in the government’s relaxation of redistributive requirements during the severe recession of the mid-1980s. More recently, especially in domestic circles, this argument has become more insistent as discontent with an apparently recidivist NEP under the current administration has heightened amidst relatively lacklustre growth following the East Asian financial crisis of 1997.17

14 This makes its first appearance in the Mid-Term Review of the Eighth Malaysia Plan 2001−2005, published in October 2003. 15 Land ownership is not part of the calculus. In the peninsula, much of the land is under Malay Reserve, with ownership restricted to Malays. 16 Among other things, the ICA required firms beyond a certain size to divest a 30 per cent share to bumiputera. The ICA was amended in 1987, raising the cut-off considerably. 17 This argument is often interwoven with the argument about the distributional and poverty reduction policies of the NEP. Despite current thinking about the linkage between growth and (in)equality (at the then and current levels of inequality, as measured by the Gini), it is in principle an empirical matter whether growth would have been higher or lower without the NEP, although the poverty-reducing impact of growth would probably have been significantly muted without an explicit poverty reduction approach. Regarding

12

While they do not give a rigorous demonstration, the following two charts suggest that the NEP did not appear to have had much of an impact on growth per se when viewed in the context of the East Asian region. Counter-factuals are notoriously difficult to refute (or prove); yet nothing in the charts suggests that Malaysia’s growth rates had suffered from the NEP. Besides, there is always the counter-argument that sans NEP, there would not have been the political stability necessary for growth. Such a view finds some support in Figure 1, which compares Singapore and Malaysia pre-1970, although it is likely Malaysia’s lacklustre performance had more to do with poor commodity prices and Singapore’s with re-positioning itself in the changing global economy.

Figure 1: GDP growth rate (% p.a.), World Bank estimates

Source: UN Statistics Division, Common Database, World Bank estimates http://unstats.un.org/unsd/cdb/cdb_advanced_data_extract.asp

post-crisis recovery, there has been at least one study from the World Bank stable suggesting that in the crisis-impacted countries there has been a down-shifting of the trend line (Hanson, 2005).

-15

-10

-5

0

5

10

15

20

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

MalaysiaKorea, Rep ofSingaporeThailand

13

Figure 2: GDP growth rate (%), 1990 constant prices, UN estimates

Source: UN Statistics Division, National Accounts Main Aggregates Database, UN estimates http://unstats.un.org/unsd/snaama/Introduction.asp

A comparison in terms of per capita GDP, in USD or PPP terms, shows the opening of a gap between Malaysia relative to Singapore, South Korea and Taiwan (and dramatically compared to the latter two). In all cases, the transition occurred around 1985, suggesting the role of prevailing global economic shifts, in particular that which followed the Plaza Accord. However, there should be other considerations of the initial inequalities in each country: Malaysia was among the most unequal while the other countries had much lower population growth rates than Malaysia. For instance, between 1970 and 2005, South Korea’s population growth rate was 1.2 per cent per annum compared to Malaysia’s 2.5 per cent, a degree of difference that accounted for more than half the Korea-Malaysia gap in per capita GDP.

Even so, even if Malaysia’s growth performance has been comparable with the other countries, the quality of that growth has lagged, especially in relation to South Korea and Taiwan.18 This has implications for future growth in an increasingly competitive world for the kinds of products that had accounted for Malaysia’s growth of the past 35 years. After the East Asian financial crisis, moreover, there has been a slowdown in private capital formation and foreign direct investment. Although this may be attributed to pre-crisis over-investment there are suggestions that the slowdown is due

18 For a recent comparative study on this, see Hulten & Isaksson (2007). Amongst the earliest to point to this was Young (1994). Milanovic (2006) produces a calculation suggesting that GDP growth between 1984 and 1997 was likely accompanied by negative total factor productivity growth.

-15

-10

-5

0

5

10

15

20

25

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

MalaysiaRep of KoreaTaiwan Prov of ChinaThailandSingapore

14

to concerns with the NEP in its current form. For the purposes of this book, it is unnecessary to enter this argument here.

Viewing political economy around a focus of poverty eradication serves two major purposes. First, it permits the book as a whole to proceed along the theoretical and thematic paths of the UNRISD Project’s policy regime approach and locate Malaysia within the typology of models proposed by the Project. To that extent, when evaluating the NEP’s significance, for example, the book will examine the ‘triadic’ connections between economic policy, social policy and political/institutional contexts that were, moreover, framed by the following parameters:

• a determined pursuit of a nationalist-capitalist project that has been fraught with internal and external tensions

• an underlying state concern with maintaining a stable configuration in the relations of power between the state and various factions and forms of domestic and global capital

• a discourse of ambitious economic planning that remains inseparable from an equally ambitious goal of social engineering

• an institutionalized convergence of poverty eradication – to ameliorate the extent of vertical inequality – with restructuring to narrow horizontal inequalities, and,

• a developed state capacity to implement its agendas and adapt its economic interventionism and vary its stances when facing ‘globalization’ and its drives towards liberalization and deregulation, particularly at moments of crises.

Second, the approach of the book facilitates the cohesion of the detailed treatment

made by different chapters of the socio-economic programmes and institutional changes that were often subsumed under NEP, whatever their origins in planning. On the one hand, these encompassed large-scale land resettlement; the promotion of MNC-led EOI; improvements to rural infrastructure and utilities; urbanization and improvements to urban housing; the expansion in education; the growth of state-owned enterprises (SOEs); and the use of legislative and administrative instruments to recompose structures of employment and investment. On the other hand, there were notable changes in state-capital relations during the crises of 1985–86 and 1997–98 which were expressed in ‘growth versus distribution’ or ‘state versus market’ debates that split the dominant party of the ruling coalition on more than one occasion. IV. Chapter summaries

In Chapter 2, Khoo Boo Teik suggests that Malaysia’s development may be seen as a process to overcome various postcolonial weaknesses – dependence on primary commodities, declining terms of trade, non-autonomous export-reliant growth, and foreign domination of key economic sectors. A developmental state carried out the process with intermediate success, benefitting from the geopolitical factors that favoured East Asian late industrialization. Multidimensional diversification, aided by a wide resource base and experience in planning, helped to equip different economic sectors with compensating degrees of competitiveness and resilience to withstand crises in the

15

world economy. The ruling coalition’s uninterrupted tenure gave a stable if increasingly authoritarian political system within which successive administrations garnered flexibility in strategic planning, policy implementation and economic management. Thus were established different policy regimes, ranging from the NEP’s interventionism and bureaucratic expansion to the Mahathirist state-capital alliance known as ‘Malaysia Incorporated’. Residual nationalist claims, the necessity of tackling an ethnic division of labour, and the NEP’s poverty eradication went some way to meet mass expectations of socio-economic improvement. Hence, even rent-seeking oligarchic aggrandizement had to be balanced by the continuation of redistributive social policies. Finally, some fortuitous factors played a part although it required institutional capacity and leadership to take advantage of those.

Khoo Khay Jin, in Chapter 3, focuses on poverty eradication and inequality, the latter being evaluated principally with reference to the distribution of corporate wealth, educational opportunities, occupations, and income. He shows the NEP’s record of social restructuring to be a formidable one for an ethnically divided society. In one generation, all groups had been lifted and the gaps between them reduced in health, education, occupation, and industry. Yet, the achievement has been uneven. Minority indigenous communities have fallen behind in education, and, with it, occupational opportunities, while the restructuring cost in education, particularly higher education, has been disproportionately borne by the Indian population. The record is less striking for income, and specifically interethnic income, restructuring. Mean incomes rose considerably while interethnic gaps narrowed but not as much as in non-income measures of health and education. Consequently, income, and specifically interethnic income, inequalities have been ‘sticky’ although there is no longer an Indian-Malay disparity and the Chinese-Malay disparity has been significantly reduced to about 25 per cent. In any case, the disparity reflects a likely class-ethnicity-location bias that has not been sufficiently targeted as part of a strategy to reduce overall inequalities. Nor have other biases been adequately addressed: gender earning differentials exceed interethnic earning differentials, while a ‘Malay premium’ persists in the government sector.

Saidatulakmal Mohd. argues in Chapter 4 that Malaysia’s welfare regime is more

economically driven or ‘productivist’ rather than being socially oriented. Social policy programmes are designed in accordance with national development strategies but economic expenditure receives priority over social services. The welfare regime’s mix of universalistic and targeting approaches is embodied in existing institutions of social protection, security and insurance. These include a civil service pension scheme, the Employees Provident Fund, Social Security Organisation, Workmen’s Compensation Scheme, the Armed Forces Fund, public welfare programmes, and complements to rural development schemes. Modified over several phases, the welfare regime has broadened its scope to include national policies for social welfare and for the elderly. Without a welfare state framework, such a regime presupposes a strong tradition of family support which may be weakening under the impact of industrialization and globalization. More recent concerns with social policy, welfare provisions and an ageing society have stressed the inadequacy – in coverage of the labour force, retirement income, and rates of return to contributions – of existing institutions of social protection and insurance. These

16

weaknesses require the reform of established forms of social insurance if they are to continue to contribute to poverty eradication in future.

Chapter 5 reviews the impact of health, education and water services on economic growth, social mobility and the wellbeing of the population. Tracing the state’s record of providing, regulating and maintaining these services, Halim Salleh discusses how policies, planning and development managed issues of adequacy, opportunity and equity especially when the state used social services to help attain the NEP’s objectives. Health and water services made important if indirect contributions to poverty eradication and restructuring, whereas education’s role was clear and massive if often controversial. Neoliberal influences and pressures from globalization, however, resulted in policy changes that permitted a steady privatization of social services. While the three social services are now subject to a public-private mix in their development, management and regulation, the commodification of formerly ‘pure public goods’ has retarded advances towards social equity. Operated in parallel, public and private institutions of health care and education – especially higher education – have not merely democratized ‘consumption’ patterns, but tilted the balance against vulnerable communities – the rural population, urban low-income residents, poor non-bumiputra students, and women in the private sector. To that degree, the social services, notably health and education, may be considerably better than those in other developing countries; yet their policy orientations remain elitist and selective, only their principal targeted beneficiaries may have changed owing to ethnic and political considerations.

The relationship of organized groups to social policy forms the core issue of Chapter 6. Francis Loh Kok Wah traces the decline of trade unionism as the long term consequence of state coercion and repression; divisions in union leadership; and segmentation of the work force by ethnicity, gender and national origin. In contrast the state has developed close ties with a well organized business class as the former privileged the private sector as the engine of growth from the 1980s. These trends undermine labour’s ability to secure more equitable benefits at the sites of production and work. Yet, poorer non-Malay social groups not targeted by the NEP, have been provided other forms of amelioration. The state has enabled the parties of the ruling coalition to undertake an unusual developmental role – to manage certain aspects of social service delivery, notably in local or community development, education and welfare. With this innovation, the state and its bureaucratic and political appendages have left little scope for the non-governmental organizations elsewhere known for their contributions to community development. Thus, a ‘repressive-responsive’ developmental state has woven a political and organisational setting in which few radical grassroots alternatives have been posited against the dominant mode of capitalist development.

In Chapter 7 Abdul Rahman Embong shows how the institutional combination of strong state capacity, clear administrative structure, powerful central planning agencies, and ample financial and human resources have enabled the state to plan and execute development policies and programmes, including poverty eradication, successfully. One indication of the strong state capacity was its maintenance of a well defined high-level structure of planning authority and decision-making that could guide key policy

17

directions and strategies. In addition to having an efficient revenue-generating and collecting system, the state has demonstrated the pragmatism needed to adapt to changing conditions, especially within the international market. When faced with crises, the state has been prepared to retain broad policy objectives while undertaking reforms and changes. Even so, many drawbacks, shortfalls and failures in the public delivery systems, seen during good and bad times, expose the prevalence of bureaucratic inefficiency and corruption. A critical area where a system of checks and balances has been weakened by executive interference is the judiciary. If the country is not to fall increasingly behind ‘peer countries’ in terms of ‘good governance’ and global competitiveness, concerted reforms will be as necessary as ensuring that the political system becomes more free, more responsive and less repressive. V. Locating Malaysia: Some lessons from the research

For its comparative study of policy regimes and poverty reduction, the UNRISD Project Proposal brings together two sets of concerns. The first set lays out various observations regarding social policy that were drawn from previous UNRISD studies of social policy, which may be summarized as follows

• To serve as a developmental instrument against poverty, social policy must be concerned with the redistributive effects of economic policy, protecting people from the vagaries of the market and the changing circumstances of age, enhancing the productive potential of members of society, reconciling the burden of reproduction with other social tasks, and sharing the burden of reproduction.

• Successful social policy is not limited to poverty eradication but has other

objectives such as national or social cohesion, and equity.

• Social policy is not an exclusive domain of advanced welfare states, to be attempted only after reaching a certain development threshold; it is, rather, a key instrument for economic and social development.

• Policy coherence is critical to achieve synergies among different areas of the

economy that make equity and growth mutually reinforcing. Redistributive polices are good for growth but their relationship requires conscious design of economic and social policies.

• Labour markets are not simply institutions for the static efficient allocation of

labour resources but are also sites for the realization of basic civil and social rights. Labour market institutions perform a developmental role, mobilizing savings, ensuring decent working conditions, and creating incentives to improve ‘human capital’.

• Universalistic policies are preferable to targeting practices for addressing issues of

poverty especially where poverty widespread poverty and institutional

18

underdevelopment tended to render targeting unnecessary and administratively costly and inefficient.

Joining the above to a second set of concerns – degrees of economic performance (showing high or low growth) and social performance (displaying high or low equality) as well as the character of political regime (whether democratic or authoritarian) – the UNRISD Project Proposal offers a four-model typology of policy regimes: Socialist, Nordic, Asian and SAP/PRSP (Structural Adjustment Program/Poverty Reduction Strategy Papers).

Where, based on our research, might Malaysia be located?

To the extent that poverty eradication in Malaysia has been successful on its own – that is, NEP, terms – it reaffirms the idea that poverty eradication policy must be ‘embedded in social and development policy’, and implemented ‘through the choice of patterns of growth, health, education, gender equality, labour market policies’ (UNRISD 2005: 4). The feasibility of the NEP as an overarching framework of social policy was predicated on economic growth and development that drew the landless into vast state-managed land resettlement schemes, and added a rural (and, significantly, female) component to a labour force engaged in an FDI/EOI-based structural transformation. Such industrial and land development strategies, premised upon planned rapid growth, were augmented by improvements to social services, notably in health and education, but also in public utilities and infrastructure not least for the poor rural population. At no time, not even at the launch of the NEP, was there an objective of installing a welfare state. Yet, there was a noticeably ‘welfarist’ cohesion to the institutions for the maintenance of protection which, as Chapter 4 shows, covered different state retirement and pension schemes, compulsory savings-contributory funds, workmen’s compensation benefits, and limited direct disbursements to specific disadvantaged or vulnerable groups. In production, significant efforts, backed by state expenditure and institutional support, were made to create new opportunities and improved services to raise rural and agricultural productivity (Chapters 2 and 7), while employment and urban development went together with manufacturing to relocate a substantial proportion of population from the rural ‘loci of poverty’ to urban industrial zones (Chapters 2 and 3). Attempts at redistribution covered many forms: state subsidies, improvements to rural, maternal and child health care, attainment of universal primary and near universal secondary education, and expansion of tertiary education (Chapter 5). In short, economic and development policies together offered some support for reproduction in the face of market vagaries, and changing personal, family and social circumstances.

Born of a near collapse of the political order, the NEP was imposed by fiat, justified by arguments of political stability, and implemented in the name of national unity. Against the last, portrayed as an inclusive national goal, the NEP’s restructuring component was always and for longer periods less acceptable than its objective of poverty eradication. Even so, the original conceptualization of the NEP was not mean-spirited. If anything, the core ideas of NEP-driven poverty eradication irrespective of race, restructuring to recompose an ethnic division of labour, and planned growth and state-support for industrialization – constituting, as it were, a social democratic- reformist

19

path of attaining development, interethnic equity and social cohesion – were part of the political discourse of an earlier radical generation best articulated by the work of James J. Puthucheary. Cynicism towards the ‘interethnic parity’ promise of restructuring grew when the ‘national ownership’ of NEP, admittedly flawed at the outset, was brazenly compromised by an elite capture of policy in the 1990s (Chapter 3) when, as it were, restructuring dethroned poverty eradication to favour aggrandizing rent-seeking coalitions of commercial and political interests.

That was, arguably, not the scenario the framers of the NEP had in mind. They were committed to state intervention to attain full employment, an expansion of education, an extension of rural health services, and an improvement in urban housing. Most of this was planned as part of state-led modernization of the agricultural sector and institution of land resettlement. Redistribution, whether poverty eradication and restructuring, had to be based on growth, the growth of a market economy epitomised by FDI-led EOI. In fact, three apparent binaries – state and market, growth and equity, and social policy and economic development – were bound to one another. In effect, social policy was not treated as a luxury of an advanced welfare state, to be deferred until a development threshold had been reached. A nexus between economic development and social policy was thus present in different ways. Institutionally, the state developed and expanded its capacity for planning, funding and implementing projects (manifest in an unbroken series of five-year plans) that fitted into a relatively coherent socio-economic strategy (Chapter 7). For example, health, education and water services were expected to be multidimensional in their beneficent effects (Chapter 5): ameliorating the conditions of the poor, investing for higher productivity, and consolidating political stability and legitimacy. In Penang, the centre of EOI, Chief Minister Dr Lim Chong Eu’s 1970–1990 strategy of ‘rural industrialization, rural urbanization, comprehensive urban redevelopment, promotion of tourism, and the development of an agro-horticultural industry’ held social policy to be the ‘partner’ of market-based development of manufacturing and services (Chapter 2), hence recalling on a smaller scale Singapore’s project in the 1970s of a ‘socialism that works’. Indeed Mahathir often claimed that since distribution was premised on growth, NEP induced more growth, not less, despite arguments to the contrary. When there was no growth in the mid-1980s, Mahathir chose to hold distribution (that is, restructuring) ‘in abeyance’ (Chapter 2).

The corollary to the economic development-social policy nexus was that social welfare provision was not narrowly conceived as starting and ending with the poor alone. Health, education, housing, infrastructure, utilities, and civic and social amenities were integrated with rural and urban development. And institutions of social security and insurance were integrated with the labour market, albeit a market regulated by regimes unsympathetic to organized labour. All that should have set a universalistic guide to social policy. But ‘targeting’ characterized a great deal of social policy implementation because of the NEP’s uneasy juxtaposition of poverty eradication ‘regardless of race’ and ethnically determined restructuring. As an example, development funding underwent a sort of ethnic rationing: ‘Malay’ rural areas benefitted while ‘Chinese’ New Villages and ‘Indian’ estates were not. In short, state-managed poverty eradication and restructuring targeted the bumiputra while the non-bumiputra poor were left to face the labour market. In time, the tensions between ‘universalism’ and ‘targeting’, virtually between poverty eradication and restructuring, had to be mediated through institutions set up to manage

20

social policy and NEP objectives. Many of these institutions, the bureaucratic appendages of the state, including state-owned enterprises, were increasingly affected by an elite capture of policy that was justified by claims to ‘interethnic parity’ among the ranks of the wealthy. Those were the institutions most beset by many administrative problems: ‘information distortion, incentive distortions, moral hazards and administrative costs, invasive loss and corruption’.

Another set of institutions, peculiar in their origin, purpose and achievements, were appendages of the ruling coalition, whose operations could only be appreciated in relation to labour market conditions and the effects of state policy implementation. By the time of rapid economic transformation, the labour market had been shaped by the defeat of a post-World War II insurgency, the repression of radical parliamentary opposition, the circumscription of active unionism in general and, in particular, the immunization of FDI’s labour-intensive manufacturing from organized labour (Chapter 6). As a result, labour was disadvantaged at critical moments when social compacts were struck – the beginning of NEP, the inception of FDI-led EOI, and the spurt towards late industrialization. Labour’s weak position was evident from the state’s refusal to enact minimum wages for plantation labour, reluctance to compel the substitution of capital and technology for low-cost labour, and acquiescence to the widening deployment of barely protected foreign labour. Organized labour, unlike organized big business, had an insignificant representation in high-level consultative councils. The state’s approach to labour’s welfare was practically defined by two goals: economic intervention to generate full employment, and social intervention towards some degree of redistribution. Improvements to the conditions of the working classes owed to tightening labour markets (especially in manufacturing, construction and agricultural commodities) at various points between the 1970s and 1990s, FDI’s higher ability to offer better terms of employment, and the social services provided by the state. However, since state social services inadequately served the lower-income reaches of the non-bumiputra communities, the ruling coalition’s ‘Chinese’ and ‘Indian’ political parties set up their own cooperatives, corporations and even universities (Chapter 5 and Chapter 6). When they worked, such constituency- or community-based institutions played a developmental role moderating the rough edges of the labour market, mitigating the state’s marginalising neglect, and reaffirmed the legitimacy of ‘an ethnic framework of power-sharing’.

Finally, the design and implementation of social policies bound up with the NEP

have had contradictory impacts on the political regimes. In the post-colonial era, mass politics meant, among other things, a democratization of socio-economic expectations – in a word, development that brought better living conditions. After 1969, the democratization of expectations – partially class and partially ethnic – was conceded via the NEP. In practical terms, though, much of poverty eradication was conflated with restructuring because of three factors. The ethnic division of labour left the Malays with the problem of ‘relative economic backwardness’. The Malays were the natural constituency of the dominant partner of the political regime. And, they constituted the cornerstone of the state’s ‘ethnic security map’ (Enloe). For the bumiputra, especially the Malays, therefore, NEP democratized access to higher incomes, better opportunities and improved living conditions, winning in return the legitimating support for the various regimes. In contrast, the non-Malay communities in general bore the burden of

21

restructuring. Any ensuing discontent was assuaged by a higher growth rate, a higher share of corporate wealth in 1990 (compared to that in 1970) and the freedom to emigrate. Beyond that was the repression of the state by legislative, administrative and police means – the anti-democratic face of NEP implementation. In times of rapid growth and plentiful opportunities for social mobility the validity of NEP’s premises was borne out: distribution with growth contained resentment. In lean times, social policies could not pre-empt social conflicts. Between the one and the other lay political struggles that met with increasing authoritarianism that has itself provoked more dissent. The outcome of those struggles lies beyond the scope of this book. But one wonders if social policy will yet affect the quality of democracy in the sense that the NEP’s overall acceptance and success have enabled a new Malay-led opposition to challenge UMNO and the ruling coalition on a range of issues that cannot be diverted along channels of ethnic rivalry.

To conclude, Malaysia’s experience falls in most closely with the ‘Asian model’ although, for obvious reasons, qualifications and deviations are unavoidable in this ‘fit’. The record shows moderate to high economic performance, high social performance in poverty reduction and, for a multiethnic society, restructuring, but inequalities of different kinds remain (Chapter 3). In development terms, comparing Malaysia to other countries that were roughly of similar socio-economic status in the late 1950s and early 1960s, the country now stands between the high-achieving Northeast Asian NIEs, on the one hand, and, on the other, the poorer countries of Southeast Asia, and the troubled East African states. That Malaysia is better off than the resource-endowed latter two groups but behind the natural resource-poor former says something about its relative achievement within the spectrum of capitalist development. Malaysia has successfully managed a path of diversified development, but not quite upgraded the manufacturing and service sectors requiring technological innovation and market competitiveness.

Malaysia, too, is not ‘Nordic’. Its welfare regime is weaker, and does not resemble a welfare state with more highly developed and more comprehensive forms of social insurance and protection. Nor is the welfare regime built upon social pacts between state, capital and labour reached by ideological political parties that programmatically captured the basic tenets and pillars of post-World War II Western social democracy. Malaysia’s regulation of the labour market in particular has weakened organized labour to the point of curbing rights to free association by different means. Despite a growing reliance on the market, the state has retained a developmental character shaped by strong economic intervention, the use of industrial policy, and large-scale socio-economic planning supported by complementary fiscal and financial policies. Even when certain regimes undertook market liberalization and deregulation and promoted privatization, they were driven to ‘pick winners’ according to political considerations rather than depend on supposed market efficiency and neoliberal frameworks of governance.

Not as democratic as the Nordic states, Malaysia’s political regimes have not been as ruthlessly repressive as the military dictatorships that oversaw late industrialization in some East Asian countries, or, for that matter, persistent underdevelopment in others. Here, democratic institutions, experiences and procedures have become increasingly illiberal towards dissent and the full exercise of civil liberties. In the past, Malaysia had been ideologically moved by a combination of goals – nation-building, social equity, advanced development, and economic nationalism – whose attainment was complicated

22

by ethnic tensions. Where it goes in the future will depend on whether its economic performance, social performance continue to be relatively high, at least high enough that demands for political pluralism cannot any longer be dismissed as anomalous claims.

23

REFERENCES

Entries for non-western names are cited and arranged alphabetically according to surnames or first names, without the use of commas, except where the first name is an honorific, or where the

name follows western convention in the original source.

Anand, Sudhir. 1983. Inequality and Poverty In Malaysia: Measurement and Decomposition. New York: Oxford University Press.

Hanson, James A. 2005. Post-Crisis Challenges and Risks in East Asia and Latin America: Where Do They Go From Here. World Bank Conference on The Financial Sector Post-Crisis: Challenges and Vulnerabilities. April 26-27, 2005, Brookings Institution, Washington, D.C. http://go.worldbank.org/EU9KFCYX20

Hulten, Charles R. and Isaksson, Anders. 2007. Why Development Levels Differ: The Sources of Differential Economic Growth in a Panel of High and Low Income Countries. National Bureau of Economic Research Working Paper 13469, Cambridge, MA.

Ishak Shaari. 2000. Economic Growth and Income Inequality in Malaysia, 1971-95. Journal of the Asia Pacific Economy, 5(1&2): 112-124.

Jesudason, J. 1989. Ethnicity and the economy: the state, Chinese business, and multinationals in Malaysia. Singapore: Oxford University Press.

Jomo K. S. 1990. Growth and Structural Change in the Malaysian Economy. Macmillan, London.

Jomo, K.S. 2004. The New Economic Policy and Interethnic Relations in Malaysia. Identities, Conflict and Cohesion Programme Paper Number 7, UNRISD.

Khoo Boo Teik. 2003. Beyond Mahathir: Malaysian Politics and its Discontents. Zed Books, London and New York.

Khoo, Boo Teik. 2008. Apex of Mediocrity: A Reflection on the State of our Public Universities. In Fong, C.W. & Yin, E.K., eds. Out of the Tempurung. Sydney, East-West Publishers.

Khoo Khay Jin. 2008. Poverty and Inequality, Malaysia Country Study Report No. 3, UNRISD Project on Poverty Reduction and Policy Regimes, November.

Leete, Richard. 2007. Malaysia from Kampung to Twin Towers: 50 years of economic and social development. Kuala Lumpur: Penerbit Fajar.

Mahathir Mohamad. 1991. “Malaysia: The Way Forward.” New Straits Times, 2 March

Malaysia. 1965. First Malaysia Plan 1966–1970. Kuala Lumpur.

_____. 1971. Second Malaysia Plan 1971–1975. Kuala Lumpur.

_____. 1973. Mid-Term Review of the Second Malaysia Plan 1971–1975. Kuala Lumpur.

_____. 1976. Third Malaysia Plan 1976–1980. Kuala Lumpur.

_____. 1981. Fourth Malaysia Plan 1981–1985. Kuala Lumpur.

24

_____. 1986. Fifth Malaysia Plan 1986–1990. Kuala Lumpur.

_____. 1991. Sixth Malaysia Plan 1991–1995. Kuala Lumpur.

_____. 1996. Seventh Malaysia Plan 1996–2000. Kuala Lumpur.

_____. 1998. National Economic Recovery Plan: Agenda For Action. Kuala Lumpur.

_____. 1999. Kajian Separuh Penggal Rancangan Malaysia Ketujuh 1996–2000 (Mid-term Review of the Seventh Malaysia Plan 1996–2000). Kuala Lumpur.

_____. 2001. Eighth Malaysia Plan 2001–2005. Kuala Lumpur.

_____. 2006. Ninth Malaysia Plan 2006–2010. Kuala Lumpur.

Maznah Mohammed. 2005. Ethnicity and Inequality in Malaysia: A Restrospect and a Rethinking. Centre for Research on Inequality, Human Security and Ethnicity (CRISE), Oxford, Working Paper 9. Accessed 8 May 2007: http://www.crise.ox.ac.uk

Milanovic, Branko. 2006. Inequality and Determinants of Earnings in Malaysia, 1984-1997. Asian Economic Journal, 20(2): 191-216.

Shireen, Mardziah Hashim. 1998. Income Inequality and Poverty in Malaysia. Lanham, MD: Rowman & Littlefield

United Nations Development Program. 2007. Human Development Report 2007/2008. New York.

United Nations Research Institute for Social Development. 2005. Poverty Reduction and Policy Regimes: A Project Proposal, Geneva.

Young, Allyn. 1994. Tyranny of numbers: confronting the statistical realities of East Asian growth experience. National Bureau of Economic Research Working Paper 4680, Cambridge, MA.

Zainal Aznam. 2005. Policy Case Study: New Economic Policy, Malaysia. Paper presented at the IADB’s Semana de Desarrollo Social, 24-27 Oct 2005. http://www.iadb.org/sds/semanasocial/Docs/Malaysia.doc .

25

CHAPTER 2

Development Strategies and Poverty Reduction

Khoo Boo Teik

The discussion of development strategies and policy regimes in this chapter will:

i. outline a trajectory of economic development and growth, and their various associated themes, mostly over the two decades of the 1980s and 1990s

ii. discuss development strategies and policies related to industrialization and the structural transformation of the economy

iii. examine changes in the character of the state and its relations to capital which shaped the institutional-corporate structure that emerged at the end of the 1990s, and

iv. discuss the relationship between the state’s trade and investment regimes and its divergent responses to the world economy at two moments of economic crisis.

On the whole, the chapter will discuss how the development strategies were

influenced by such concerns as a reliance on export-led growth, the recognition of the importance of diversification; the centrality of certain social policies; and a general postcolonial impulse to go beyond ‘underdevelopment’. In discussing the structural transformation of the economy, the chapter will examine policy changes that experimented with different programmes and orientations of industrialization. It is suggested that the state planned and administered the process of structural transformation guided by certain nationalist-capitalist impulses. Among other things, the state strove to maintain stable configurations of state-market relations, to adapt the openness of the small national economy to the ‘vagaries of the world economy’ but also to shape institutional-corporate structures particularly in times of economic crises.

Within this investigation of development strategies and policy regimes, the chapter

weaves together issues such as the effects of different programmes of industrialization, the relative success of trade and investment regimes, consequences of trade and financial liberalization, and the development of state capacity for managing economic crises. At the conclusion of the chapter is a summary perspective on the factors that have contributed to Malaysia’s particular trajectory and record of development. I. Regimes and transitions

As the overview of economic development and transformation in Chapter 1 has

shown, considerable progress had been made in poverty eradication according to the objectives and terms of the New Economic Policy (NEP). Nothing from the account given in Chapter 1 implied the end of poverty in its absolute, ‘hardcore’, or relative

26

forms, or its obsolescence as an important political issue.19 Nor had poverty been reduced exactly as planned, as if without resistance or retreat.20 Even so, ‘poverty eradication’ as a national objective became sufficiently embedded in a matrix of development strategies, social policies and state institutions that it would not be jettisoned by severe structural adjustments even amidst a recession in 1985–86 and the East Asian financial crisis of 1997–98. Minimally that was itself evidence that policy formulation was not captive to neoliberal arguments that credited a free and efficient market as the ultimate determinant of economic performance. In fact, the post-1969 administrations did not share the neoliberal faith in merely maintaining ‘market-augmenting’, ‘pro-growth’, ‘pro-investment’ and ‘pro-market’ macroeconomics. They prided themselves and persuaded others that they were pragmatically responsive to market demands. They kept the economy open to domestic private investment, attractive to FDI, and integrated with international trade and global markets. Yet, by ‘governing the market’, they brought about three key transitions in developmental terms, namely:

• the economy was transformed from a postcolonial commodity producer to an NIE • the state turned from being largely laissez faire to being actively interventionist,

and, • late industrialization recast the interventionist state as a variant of the ‘East Asian

developmental state’. Underlying those transitions was the social engineering project of the NEP

(Chapter 1). At its core, the NEP was designed to overturn an ethnic division of labour, a bane of Malaysian political economy that the Alliance regime (1957–69) could not overcome with its laissez faire approach to economic management. Lucidly described as a ‘part of a class structure [that] has crystallized along ethnic lines’ (Wheelwright 1965: 110), the ethnic division of labour was readily used to stoke interethnic recriminations whether it was correlated with poverty or with wealth. To the extent that NEP was in command, part of development strategy and economic policy was driven by social policy.

Yet, the NEP stood for a nationalist-capitalist project that terminated the pre-1969

regime and restructured a tripartite balance of power – between the state, domestic and foreign capital – that had long been critical to the stability of Malaysian political economy. Initially, the power restructuring led to a partial rupture between state and capital as the former imposed its new regime of interventionism and regulation. Not for nothing did Tun Abdul Razak, the NEP’s principal architect, who spoke of achieving ‘rapid economic transformation’ that was guided by concerns with ‘social equality’, call the NEP ‘nationalistic socialism’ that encompassed ‘state participation’ and the ‘doctrine of welfarism’ (Abdul Razak 1971). However, the nationalist-capitalist project underwent an important reorientation when Mahathir became Prime Minister at the start of the NEP’s second decade. Under Mahathir’s leadership, the character of the state changed 19 For example, only citizens are included in these enumeration exercises, despite a growing underclass of legal and illegal migrant workers. See Chapter 3 for an evaluation of the real extent of the state’s achievement in managing the reduction of poverty and other forms of inequality. 20 See Jomo (1990: 102–3) for a brief comment on the limitations of ‘partial planning’ for an open economy practicing a capitalist development strategy.

27

and so did its development strategies and policies. Having inherited an interventionist state, Mahathir attempted to refashion it as a local variant of the East Asian developmental state. Prime Minister for 22 years beginning in 1981, Mahathir laid out a fresh development strategy that restored the state-capital alliance in the name of ‘Malaysia Inc.’ Within the domestic setting, he did not replace the NEP but, as it were, he displaced it from the centre of the nationalist-capitalist project. He showed that the NEP could be flexibly balanced against, or realized through, other developmental goals in September 1986 when he suspended the NEP’s restructuring requirements, and again in 1990 when a National Development Plan was formulated to succeed the NEP. Within the global setting, certain of his ambitions and two economic crises compelled his administration to respond flexibly to global capital – by liberalizing and deregulating in the face of the 1985–86 recession, but by turning semi-autarkic in response to the East Asian financial crisis of 1997. Since the latter crisis and Mahathir’s retirement at the end of October 2003, those who lead economic planning have reinstated NEP restructuring in development policy, as shown by the Ninth Malaysia Plan 2006–2010 (Khoo 2007). Socio-political parameters

In short, there has been a complex and often unpredictable interplay between development strategies, economic transformation, social engineering, internal and global market forces, and institutional changes. The outcome from all this was a multiplicity of development strategies and policy regimes, the key features of which are summarized in Table 2 and Table 3. This Report focuses on the development strategies and policy regimes of the period when Mahathir was Prime Minister for the following reasons:

• being the longest, the ‘long Mahathirist regime’ has shaped development

strategies and policy regimes that remain today • part of the NEP period, it inherited certain paths which it substantially modified • two key transitions happened during this period – from EOI to HI, and from an

interventionist to a developmental state • the regime had to manage two crises which produced far-reaching responses, and • it is the basis for a transition the critical directions of which are not yet clear.

Strategies and policies are obviously not mere technical matters. They are highly

political as well. This Report discusses strategies, policies and outcomes as they are bound by several socio-political parameters.. First, the state has consistently sought to maintain a stable tripartite balance of power – between itself, domestic capital and global capital. Second, there was a determined pursuit, after 1970, of a nationalist-capitalist project that was itself fraught with internal and external tensions. Third, an ambitious goal of social engineering was tied to an equally ambitious discourse of economic planning. Fourth, there was an institutionalized convergence of poverty reduction (to reduce vertical inequality) with the NEP’s ethnically based restructuring (to narrow horizontal inequalities). Fifth, the state developed an ability to implement its agendas or alter its policies, not least in response to economic and political crises. Thus, an understanding of these parameters provides an overall conceptual framework for evaluating particular strategies and policies.

28

Table 1

Administrations, Policies and Regimes 1957–1990 Regime Period Ruling coalition /

administration Core political concerns

Economic policies Social policies Institutions and agents

1957 to

1969

Alliance

Decolonization, nation-

building, counter-insurgency

Laissez faire, competitive commodity production,

diversification, ISI, agricultural and infrastructural improvements

Ameliorative welfarist measures, education;

revision of civil service terms and pay, credit for housing, expanded EPF

coverage

Market, central bank prudence, state agencies

and development authorities

1970

to 1980

National

Operations Council, Barisan Nasional (BN)

Re-shaping political system: co-optation, more efficient administration,

imposing social engineering

Promoting MNC-led EOI, state investment,

employment creation, land resettlement and

rural development, urbanization

poverty eradication, employment and training, restructuring wealth and ethnic division of labour, human capital formation,

home ownership

Bureaucracy, SEDCs, SOEs, Malay trust

agencies, state-owned banks, Petronas

1981

to 1985

BN: early Mahathirism

Constructing economic nationalism: new state-

capital alliance, reform of administration,

reorientation of mass expectations

Corporate takeovers, heavy industrialization, financial liberalization, beginning privatization,

counter-cyclical spending,

Bureaucratic reform, BCIC, Islamization;

lowered tax rates, income bands adjusted upwards,

expanded child relief

SOEs, HICOM, UMNO’s fleet, domestic

conglomerates, stock market

1986

to 1990

BN: NEP in

abeyance

Surviving recession, curbing dissent, political

repression

Counter-recessionary measures, austerity, debt

servicing, liberalizing FDI rules, privatization,

industrial deepening

Stimulating growth, creating employment, re-

training unemployed graduates

FDI, privatized entities, major conglomerates, HICOM, EPU (IMP)

Note: See the end of the chapter for a glossary of abbreviations.

29

I. Table 2 Administrations, Policies and Regimes 1991–2003

Regime Period Ruling coalition /Administration

Core political concerns Economic policies Social policies Institutions and agents

1991 to

(June) 1997

BN: triumphant late Mahathirism

Settling political succession,

consolidation of oligarchy, regional

triumphalism

Industrial deepening, intensifying privatisation,

diversifying corporatisation, services (finance and tourism), new global-domestic interfaces:

MSC, outward investment, foreign labour, economic

regionalism

Social-market instruments for

restructuring, ASN, ASB, expansion and

liberalisation of higher education; National Development Plan;

reform of education; lowered income tax rates

Major conglomerates, FDI, Malaysian Business Council, MSC authority,

IPPs

(July)

1997 to 1999

BN:

Mahathirism in crisis

Crisis management, resistance to

reform, repression of dissidence;

surviving general election

Retreat from liberalization, semi-autarky: capital controls, currency peg, rescue, reflation, recapitalization; consolidation

of banks

Tax cuts, reducing number of students sent abroad, no tax on 1999

personal income

State crisis agencies: Bank Negara, Danaharta, Danamodal, CDRC; IMF,

foreign funds; local banks, conglomerates;

Petronas, EPF

2000 to

October 2003)

BN:

Mahathir’s last administration

Containing Malay recalcitrance;

preparing succession in

UMNO

Re-nationalisation of ailing projects and companies;

reducing capital controls; state-market rapprochement

Privatization of health care, lower tax rates, higher personal relief

Bureaucracy, conglomerates,

(November) 2003

and after

BN: Old state, new administration

Recovery of legitimacy,

placating core constituents, reconstituting

power, Islamisation

Partial return to liberalization, GLCs and governance,

trimming fiscal deficit, fuel subsidy reductions, new major

infrastructure; removal of currency peg, FTA negotiations

Palliative and populist measures, rural

improvements, civil service pay rises, return

to emphasis on NEP restructuring

Khazanah, GLCs, GLICs; new technocracy, new

segments of BCIC

Note: See the end of the chapter for a glossary of abbreviations.

30

II. Growth and diversification

Over a half century since independence, the Malaysian economy grew steadily. Moderate average annual rates of Gross Domestic Product (GDP) growth of 4.1, 5.0 and 5.4 per cent were respectively achieved for the five-year periods of 1956–60, 1961–65 and 1966–70. Under the first government – the Alliance coalition – economic management was conservative, generally regulatory and supportive of market initiatives. Even then, much of the growth being both export-led and dependent on primary commodities, a programme of diversification was encouraged within agriculture to reduce the reliance on rubber. The Federal Land Development Authority (FELDA) promoted the cultivation of crops such as the oil palm in its settlement schemes. On the whole, the state expanded the land under cultivation (through opening FELDA schemes), supported rubber replanting to improve yields and outputs, and encouraged shifts to more highly priced crops. Subsequently, forestry products, notably tropical timber, became an important source of commodity export. Hence, the economic growth was significantly attributable to increases in the volume of exports, changes in the composition of exports and, sometimes, favourable commodity prices (Jomo 1990: 53). Sources of growth

More pronounced spurts of growth were seen in later periods, notably for the first NEP decade of 1971–80 and during the early 1990s (Table 3). Between 1960 and 1994, in fact, GDP rose by an annual average rate of 6.5 per cent while GDP per capita rose from RM1,884 to RM6,563 or at an average annual rate of 3.7 per cent (Lucas and Verry 1999: 5). Again, much of the economic growth was export-led. But, if up to the 1960s, primary commodities supplied the bulk of exports, manufactured products would subsequently dominate exports. For each of the five-year Malaysia Plan periods from 1971 to 2005, the manufacturing sector recorded a higher growth rate than agriculture (Table 3). From 1960 to 1987, the manufacturing sector’s share of GDP rose from 8.6 per cent to 22.4 per cent while the agricultural sector’s share declined from 40.5 per cent to 21.8 per cent. There were two notable periods of high manufacturing expansion – the 1970s when EOI made its appearance, and from the late 1980s to the mid-1990s when a wave of FDI boosted another round of EOI. By the 1990s, two decades of relatively rapid industrial expansion had turned manufacturing into the leading export sector.

Table 3 Average Annual Rates of Growth (%) for GDP, Agriculture,

Manufacturing and Labour Force, Malaysia Plan Periods 1971–2005 Period 1971–75 1976–80 1981–85 1986–90 1991–95 1996–2000 2001–05 GDP 7.3 8.6 5.1 6.7 7.5 3.0 4.5

Agriculture 4.8 3.9 3.4 4.6 3.5 1.9 3.0 Manufacturing 11.6 13.5 4.9 13.7 11.5 3.9 4.1 Labour force 4.3 3.5 3.0 3.1 2.9 2.2 3.4 Employment 3.4 3.5 3.2 3.3 3.2 2.0 3.3

Sources: Malaysia (1973: 66, Table 4-1); Malaysia (1976: 151, Table 8-10); Malaysia (1981: 76–77, Table 4-4, 227, Table 12-8); Malaysia (1986: 40, Table 2-1; 136, Table 4-5); Malaysia (1991: 28, Table 1-7); Malaysia (1999: 41, Table 2-3, 106, Table 4-2); Malaysia (2006: 50, Table 2.2, 239, Table 11-2)

31

The agricultural sector (including forestry and fisheries), however, remained

important. Although its share of total employment had declined, it was still 20 per cent in 1994 (Lucas and Verry 1999: 148). The foreign exchange earnings of natural resources such as tropical timber and crops like the oil palm were especially valuable in offsetting downturns in manufacturing, or in near-recessionary situations (during the mid-1980s and late 1990s respectively). Alleviating rural poverty, by opening state land for settlements and plantations in lieu of undertaking radical land reform, constructing infrastructure and providing utilities, and making improvements to production and standards of living in the agricultural sector, became an established way to retain the political support of the rural constituencies of the United Malays National Organization (UMNO), the dominant party of the ruling coalition. ISI: hopes and flaws

Even so, a prominent theme of Malaysian economic development is its rather determined statist pursuit of industrialization but via different approaches at different times. During the 1960s, the state encouraged and supported import-substituting industrialization (ISI), albeit the state ‘neither initiated industrial projects itself, nor did it attempt to direct private industry to produce certain products’ but ‘encourage[d] private sector development by means of nonselective inducements’ (Bowie 1991: 69). The inducements included establishing industrial estates, upgrading urban infrastructure, and offering tax incentives and tariff protection to ‘pioneer industries’ that manufactured for the domestic market. This ISI policy led to small increases in the manufacturing sector’s share of GDP and total employment,21 even though manufacturing value added rose rapidly towards the end of the 1960s (Snodgrass 1980: 209).

Yet the ISI strategy, initially thought to be promising, soon reached the limits of

its potential contributions to economic development and growth. On the one hand, the strategy encountered the kinds of weaknesses associated with ISI in general, including: high and protracted tariff protection, low foreign exchange savings, domination by foreign companies, restriction of production to final consumer goods, weak economic linkages, lack of scale economies because of a small domestic market, and low employment-generating potential owing to capital-intensive production (Edwards 1995: 16–17, Jomo 1990: 122, Rasiah 1995: 77). On the other hand, the ISI strategy faced limitations that were peculiar to the Malaysian situation. There was some complacency then to economic management which had ‘“coasted” along, relying on reasonable returns from its staple exports to maintain and slightly improve its living standards, without very much of a change in the structure of its economy and the pattern of its employment’

21 The manufacturing shares of GDP were 8.2 per cent in 1955, 8.6 per cent in 1960, and 10.4 per cent in 1965. There is some difficulty in using the data for any consistent comparison over time: the first figure pertained to the colonial period, the second was for Malaya only, while the third covered Malaysia (but by August of that year, Singapore had seceded from Malaysia). As a proportion of total employment, manufacturing accounted for 6.4 per cent in 1957 (for Malaya) and 8.4 per cent in 1965 (for Peninsular Malaysia) and 11.4 per cent in 1970 (Malaysia but after EOI had begun). See Jomo (1990: 123, Table 6.1).

32

(Wheelwright 1965: 119). Without urgency in the promotion of manufacturing, ‘the major obstacles to an accelerated programme of industrial development were political, social and ideological’ – respectively, the state relied on foreign-owned pioneer industries to circumvent Malay fears of Chinese economic domination, refused to use public enterprises to industrialize, and was unwilling to use ‘various fiscal and other devices’ to enlarge the domestic market for industrial products (Wheelwright 1965: 119). III. Late industrialization and structural transformation

In the event, political crisis in 1969 supplied the urgency to spur industrialization but along a different orientation. Earlier, the limitations of ISI had prompted the state to explore the potential of export-oriented industrialization (EOI). The Investment Incentives Act 1968 and the 1969 Penang Master Plan, for example, had already laid out the legislative and planning bases for attracting FDI to spearhead EOI. As it responded to the Alliance’s electoral losses on 11 May and the interethnic violence of ‘May 13’ by launching the NEP, the state found economically and politically crucial roles for an EOI programme which would be led by multinational corporations (MNCs) that were themselves looking for suitable and stable offshore production sites. First, the EOI brought FDI inflows that could contribute to industrial growth. Second, the MNCs’ labour-intensive production of textiles and garments, and electronic products was expected to generate mass employment that could assist poverty reduction under the NEP. Third, and unlike small domestic industrial concerns, the MNCs could absorb large numbers of Malay workers, especially from the rural areas, thus helping to meet the NEP’s second, restructuring, objective, too. Third, there was the longer-term hope that EOI would progress to higher technology-, capital-, and skill-based production, creating spillover effects and linkage opportunities for domestic firms. The state in turn offered the MNCs a package of advantages: fiscal, tax and other incentives, sound physical infrastructure, and a schooled, disciplined and non-unionised labour force.22 Hence, the state and foreign capital found common interest in a relatively early phase of a ‘new international division of labour’. Successes of EOI: growth, employment and exports

The cumulative effect of the industrialization programme was to facilitate a structural transformation of the economy from its previous dependence on agriculture and primary commodities. That the state had at the very least realized its basic goals in determinedly pursuing industrial development, especially by way of attracting and retaining FDI in EOI may be seen from the growing contributions of the manufacturing sector to gross domestic product, employment, and the value of exports.

By 1985, which was roughly about 25 years after ISI promotion and fifteen years

after the entry of the MNCs into EOI, the manufacturing sector had accounted for 19.7 per cent of GDP, almost as large a share as the 20.8 per cent contributed by agriculture, 22 For a summary of many different types of rather substantial incentives, see Jesudason (1989: 171–72).

33

formerly the leading economic sector (Table 4). By 2000, the manufacturing share (34.7 per cent) of GDP was 2.7 times that of the share of agriculture (12.8 per cent).

Table 4

Sectoral Shares (%) of Gross Domestic Product 1960–2000 1960 1965 1970 1975 1980 1985 1990 1995 2000Agriculture & forestry 37.8 31.5 30.8 27.7 22.2 20.8 18.7 13.5 12.8Mining & quarrying 5.9 9.0 6.3 4.6 4.6 10.4 9.7 7.5 7.0Manufacturing 8.7 10.4 13.4 16.4 20.5 19.7 27.0 33.1 34.7Construction 3.0 4.1 3.9 3.8 4.5 4.8 3.5 4.5 3.5Electricity, gas, water 1.35 2.3 1.9 2.1 2.3 1.7 1.9 2.3 2.9Transport, storage & communications

3.6 4.3 4.7 6.2 6.5 6.4 6.9 7.4 8.2

Wholesale/retail trade, hotels, restaurants

15.7 15.3 13.3 12.8 12.6 12.1 11.0 12.3 12.8

Finance, insurance, real estate, business services

6.1a 6.2a 8.4 8.5 8.2 9.0 9.7 10.8 13.6

Government services 6.5 6.2 11.1 12.7 13.0 12.2 10.7 9.5 9.9Other services 11.4 10.81 2.5 2.8 2.5 2.3 2.1 2.1 2.3a Includes ‘ownership of dwellings’. Sources: Jomo (1990: 40–41, Table 3.2); Malaysia (1981: 11, Table 2.1); Malaysia (1999: 41, Table 2-3)

In employment, as the agricultural sector’s share of total employment declined, that of the manufacturing sector rose significantly. During the early 1990s, certainly by 1995, manufacturing overtook agriculture in terms of their shares of total employment (Table 5). Besides, certain features of manufacturing employment suggested that the sector had also fulfilled to some extent the social concerns of the NEP.23 As the indicative 1980s data in Table 6 shows, employment in the manufacturing sector was highly skewed towards lower-skilled production-related occupations (whereas professional and managerial personnel constituted only about 5.1 per cent of the labour force in 1987). Yet, inasmuch as high rates of unemployment would have been worse for ‘poverty eradication’, it is unclear what other development path in the same period would have adequately absorbed unskilled and semi-skilled workers. 24 It might be observed in passing that there has been a small measure of educational ‘upgrading’, with larger proportions of the manufacturing workers having secondary school qualifications compared with the labour force as a whole. Comparing a rising Malay share of manufacturing employment in the 1980s with a correspondingly declining Chinese proportion, it might also be said of EOI that it had helped to recompose the ethnic division of labour, as was initially and always expected of the MNCs. Manufacturing has somewhat altered the gender division of labour, too. By the late 1980s, there were

23 The discussion in this paragraph is mostly drawn from Lucas and Verry (1999: 191–92). 24 It should not be forgotten, however, that segments of the EOI labour force fought for many years, but in vain, against laws, the state’s repressive conduct and employers’ hostility, that prohibited or denied their unionization as a precondition for obtaining better terms of employment.

34

proportionally more women workers in the manufacturing sector than the economy as a whole (Table 7).

35

Table 5 Sectoral Shares (%) of Total Employment 1965–2000

1965 1970 1975 1980 1985 1990 1995 2000Agriculture and forestry 55.1 53.5 49.3 39.7 35.7 27.8 19.0 16.1Mining and quarrying 2.4 2.6 2.2 1.7 1.1 0.6 0.5 0.4Manufacturing 6.9 8.7 10.1 15.7 15.1 19.5 25.7 27.5Construction 2.7 2.9 5.6 6.9 6.4 8.8 8.5Electricity, gas and water 0.6 0.6 0.6 0.7 0.8 0.9Transport, storage and communications

8.3

4.0 4.6 4.3 4.9 5.0 5.2Wholesale and retail trade, hotels, restaurants 11.4 12.6 14.0 15.5 16.4 16.8Finance, insurance, real estate, business services 0.8 0.8 1.6 1.9

32.9 a

4.7 5.1Government services 12.0 13.0 13.7 15.0 12.8 10.8 9.9Other services

27.33.7 3.9 3.1 3.2 - a 8.3 9.6

100 100 100 100 100 100 100 100a According to Malaysia (1991: 28, Table 1-7), all ‘non-government services’, including ‘other services’ accounted for 32.9 per cent. Sources: Tan and Mohd Arief (2000: 68, Table 5.1); Malaysia (1976: 68, Table 4-10); Malaysia (1986: 138, Table 4.6); Malaysia (1991: 28, Table 1.7; Malaysia (1999: 106, Table 4.2)

36

Table 6

Manufacturing and Total Employment by Education, Gender, Ethnic Group and Occupation, Various Years

Proportion of manufacturing employment (%)

Proportion of total employment (%)

1980 1983 1985 1987 1980 1987 Education None/unknown 8.0 8.0 6.8 6.5 8.8 12.6 Primary 42.2 40.5 38.4 34.7 43.6 37.3 Lower secondary 27.3 29.1 29.4 30.6 18.0 22.1 Upper secondary 18.9 19.6 21.1 23.4 14.6 20.3 Post secondary 1.5 1.2 1.6 2.2 0.4 2.6 Tertiary 2.1 1.6 2.3 2.6 3.6 5.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 Gender Male 61.1 56.1 56.4 53.9 66.5 64.6 Female 38.9 43.9 43.6 46.1 33.5 33.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 Ethnic group Malay 37.8 36.5 39.9 41.4 47.8 44.9 Chinese 50.1 43.3 42.8 41.4 33.5 33.1 Indian 9.9 11.1 10.9 11.4 Other 2.2 9.3 6.4 5.8 18.7a 22.0a Total 100.0 100.0 100.0 100.0 100.0 100.0 Occupation Professional 2.3 2.3 2.8 2.5 6.7 7.6 Managerial 2.9 3.1 3.2 2.6 1.8 2.0 Clerical 6.4 6.9 7.4 6.7 8.3 9.4 Sales 2.6 0.9 1.2 1.0 9.8 11.9 Service workers 1.5 1.8 2.2 2.0 9.0 11.8 Productionb 84.3 85.0 83.2 85.2 64.4 57.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 a Includes Indians since no separate data were available. b Includes agricultural workers. Source: Lucas and Verry (1999: 191, Table 6.2)

37

Table 7

Female Employment Shares (%) by Industry, Various Years 1970 1975 1980 1987 Agriculture 37.0 40.8 39.6 35.3 Mining 12.8 12.3 13.7 11.1 Manufacturing 29.0 39.3 40.7 45.5 Utilities 5.2 3.2 5.7 2.9 Construction 7.1 6.4 5.7 4.7 Transport, storage and communications 4.2 6.3 7.9 9.9 Finance, commerce 17.9 26.9 28.7 36.2 Trade 31.531.5 38.2 Other services

29.7 37.9 35.3 39.9

Total 31.8 34.5 33.5 35.4 Source: Lucas and Verry (1999: 51, Table 3.11)

Finally, the importance of manufacturing has nowhere been more obvious than in the export sector. The manufacturing sector’s share of gross exports had progressively risen from the 1970s to the early 1980s. By the 1990s, manufactured goods had reached an indisputable dominance in exports: they accounted for 60.4 per cent of gross exports in 1990 and over 80 per cent in subsequent years (Table 8). It might even be said that the export sector, once dependent on primary commodities had now become glaringly manufacture-dependent.

Table 8 Sectoral Shares (%) of Gross Export Value 1965–2000

1960 1965 1970 1975 1980 1985 1990 1995 2000a 2005a Agriculture 66.1 54.5 56.0 49.4 39.8 29.3 18.8 12.8 4.8 5.9Mining 22.2 30.0 22.8 20.9 33.3 33.3 17.3 7.0 7.0 9.4Manufacturing 8.5 12.2 11.9 21.4 22.2 32.8 60.4 75.0 85.2 80.5Other exports 3.2 3.3 9.3 8.3 4.7 4.6 3.5 5.2 1.5 2.6Gross exports 100 100 100 100 100 100 100 100 98.5 98.4a Percentages based on gross exports do not total 100% (Malaysia 2006: 75, Table 2.15). Sources: Malaysia (1981: 18–19, Table 2-3); Malaysia (1986: 49, Table 2.4); Malaysia (1991: 23, Table 1-4); Malaysia (2006: 75, Table 2.15) Limitations of EOI

By the 1980s, several unsatisfactory features of the EOI were widely criticized, including: high import content, weak linkages to domestic firms, low wages and remuneration, low transfer of skills and technology, low revenue generation, and vulnerability to global market fluctuations. For example, Edwards (1995) argued that EOI did not resolve the dualist character of the manufacturing sector. The ISI sector was highly inward-oriented while the EOI sector was highly outward-oriented. In 1987, for instance, only 18 per cent of ISI gross output was exported whereas 96 per cent of the

38

EOI gross output was exported.25 With neither sector having extensive linkages within the domestic economy, but being highly import-dependent at the same time, both sectors effectively became ‘export and import enclaves’ (Edwards 1995: 20). The lack of strong linkages between the MNCs and local firms, generally acknowledged, was variously blamed on the state for conceding too much to FDI in a desperate effort to generate investment and employment after May 13 (Rasiah 1995: 199), or on ‘the government’s lack of leadership in building up the electronics industry’ and the absence of a ‘strong supporting local sector’ (Jesudason 1989: 175).

Within the manufacturing sector in 1991, FDI accounted for 42.5 per cent of

value added, 44.2 per cent of employment and 40 per cent of fixed assets (Lucas and Verry 1999: 185). Before 1997, foreign companies accounted for about 60 per cent of manufacturing investment (BNM 2000: 56). The direct economic benefit of EOI production, too, was apparently lower than anticipated. By an official assessment, the gross output of the electronics industry in 1981 was RM3,896.8 million while inputs cost RM2,704.4 million, giving a value added of RM1,192.4 million of which RM326.9 million was made up of salaries and wages for 70,658 full-time workers. In other words, ‘value added accounted for only 30.6 per cent of gross output value, with almost 70 per cent consisting of imported inputs, while the wages share came to only 27.4 per cent of value added, suggesting a very high profit rate’ (Jomo 1990: 139).26 If there was general agreement on the benefits of EOI to the domestic economy, it was seldom more than an acceptance of ‘the quick provision of employment’, arguably taking place ‘while [the state] concentrated on the creation of a Malay capitalist and managerial class under the NEP’ (Jesudason 1989: 179).

A push towards heavy industrialization

As it were, after EOI came heavy industrialization (HI). That did not happen because of any inexorable progression from ISI to EOI to HI. Yet, as with EOI after 1969, so it was with HI after 1981: a plan existed that would be executed when circumstances permitted. In this case, the favourable political circumstance was Mahathir’s assumption of the premiership at a time when dirigiste East Asian states (and South Korea in particular) seemed to have set a replicable pathway to industrial success. Even though Mahathir had earnestly promoted FDI-led EOI before, he once likened the EOI’s leading electronics sector’s leading product, the semiconductor or microchip, to an ‘undifferentiated manufactured product’ that was similar to any other primary commodity in the realm of trade (Khoo 1995: 119). Nor did he relish the prospect of being tied to an EOI that was ‘grounded in the mediocrity of mere assembly operations’ (Khoo 1995: 119). ‘Looking East’ to Japan and South Korea, he unveiled a different industrial plan

25 Resource-based industries, however, exported 72 per cent of their gross output. See Edwards (1995: 38, Table 5). 26 Finding that ‘at least in 1985, foreign firms tended to pay better wages than did local firms’ and were yet ‘managing to export very successfully’, Lucas and Verry (1999: 196) counseled that ‘considerable doubts should be raised about the immediacy of policy concerns to lower unit labour costs to aid exports’.

39

that would bring ‘substantial benefits to the economy in terms of technology, skills and the numerous spin-offs, and will lay the foundations for Malaysia to become an industrialized society’ (Khoo 1995: 119).

In 1980, while he was Minister of Trade and Industry, Mahathir had set up a state-

owned Heavy Industries Corporation of Malaysia (HICOM). Now, HICOM became the state’s corporate vehicle for implementing an HI programme that (eventually) embodied the manufacture of steel, automobiles, motorcycle engines and cement. HICOM’s programme began with an import-substituting character; its intermediate objectives included technological upgrading and the creation of extensive linkages in the economy; its eventual goal was export competitiveness. Critics, including some members of Mahathir’s Cabinet, warned that the HI programme would encounter serious difficulties, including: a small domestic market (for ‘second wave ISI’) with dubious export potential in very competitive international markets; uncertain returns on expensive projects of long gestation periods; the burdens of high levels of state subsidy, high rates of tariff protection and high costs to consumers; the lack of indigenous technological and managerial capability; and a risky reliance on imported technology (which was untested in the case of the steel project). Undaunted, Mahathir and HICOM embarked on their HI venture almost as if to prove Gerschenkron’s thesis that late industrialization depended on concerted state intervention, strong ideological stimulus and new institutions to overcome existing obstacles to large-scale industrialization. The state would not rely on domestic capital which was reluctant to assume the risks, or which, ‘being Chinese’, did not accord with NEP’s goal of sponsoring the rise of Malay capital. Instead, the state invested heavily with external borrowings. Since it did not possess the technology and processes, the state sourced them from Japanese and South Korean joint-venture partners. And for the experienced indigenous (that is, Malay) corporate and professional management that it needed but did not quite have, the state selected the more experienced of its senior civil servants (Machado 1989–90, 1994).

HICOM’s projects were launched under the unfavourable conditions of the mid-

1980s. The prices of Malaysia’s export commodities, including petroleum, fell across the board, reducing state revenues and contributing to recession in 1985. Still, the state persisted with its investments in the HI projects, while it reduced public expenditure elsewhere. The sharp appreciation of the Japanese yen following the 1985 Plaza Accord increased the state’s fiscal burden of servicing its yen-denominated loans. Perwaja Steel turned out to be an industrial and financial failure; among other things, its imported technology and processes were unviable and the company was saddled with unending losses. The manufacture of a Malaysian car by the state-owned Perusahaan Otomobil Nasional (Proton), produced mixed outcomes. The first phase of operations suffered problems of production, quality control, management, and rises in unit prices because of the appreciation of the yen, and the collapse of demand owing to recession (Abdulsomad 1999: 279). Only after local managers had been replaced with their counterparts from the Japanese partner (Mitsubishi) was production quality improved.

With continued state support, preferential treatment and high protection against

foreign competition, however, Proton was able to emerge in the early 1990s as a

40

corporate success on increased domestic demand generated by economic recovery and growth. Indeed, prior to the 1997 crisis, Proton captured up to 73 per cent of the domestic automobile market. Using preferential procurement practices and vendor development support measures, Proton developed a substantial domestic vendor network for automobile components and spare parts. By the time it was privatized, therefore, Proton had to some degree met the state’s objectives for manufacturing a ‘national car’. Those objectives were principally to rationalize and advance the automobile industry (formerly restricted to car assembly), promote related and supporting industries, raise the utilization of locally made components, upgrade technological and engineering skills, and facilitate Bumiputera involvement in an industry long dominated by foreign and Chinese capital (Abdulsomad 1999: 278–79). But the post-Mahathir years have seen an increased competition to Proton from other domestic car producers and importers, Proton’s own inability to compete effectively in the export market, and changes in the state’s automobile policy. Consequently, it seemed likely for a time that Proton might enter into a joint-venture with a large foreign automobile maker that would effectively strip Proton of local control and terminate its status as HICOM’s most prestigious HI project. IV. Institutions of State, Structures of Capital

There is no reason to personalize the HI programme, notwithstanding the preceding emphasis on Mahathir’s intentions and his authoritative role in establishing HICOM and launching its projects. The significance of HI for development strategy and policy regimes lies elsewhere. If growing industrialization indicated a structural transformation of the economy, and the switch from ISI to EOI showed a significant reorientation within the manufacturing sector, then the drive to HI signaled an impulse towards late industrialization that required the transformation of the character of the state. Multiple roles of the state

With the advent of NEP, the state had already taken on a multiplicity of roles. It was, first, the provider of opportunities. It gave Malay entrepreneurs, graduates, professionals and civil servants financial assistance, credit facilities, contracts, preferential share allocations, subsidies, scholarships, and training. The product of this provision was a wide range of Malay entrepreneurs and capitalists (Searle 1999: 81-95), a sizeable Malay middle-class (Abdul Rahman 1995), and a considerable ‘bumiputera participation rate’ in the professions (Jomo 1990: 82-83, Table 4.2, Malaysia 1999: 85, Table 3-7). Second, the state functioned as a stringent regulator of domestic and foreign businesses and enforced compliance with the NEP by using legislative means (the Industrial Coordination Act 1975) and bureaucratic procedures (set by the Foreign Investment Committee and the Capital Issues Committee). Third, the state became a major investor. To raise the Malay ownership of corporate equity, the state used public resources to acquire assets via corporate restructuring exercises that included setting up public enterprises, and buying into or buying up local and foreign businesses. Thus, the state came to control the ‘commanding heights’ of the economy – plantations, mining, banking and finance, and property and real estate (Heng and Sieh 2000: 136). Finally, the

41

state served as the trustee of Malay economic interests. State-owned agencies, banks, and funds held corporate equity ‘in trust’ for the bumiputera.27

These multiple roles of the state had to be supported by a multidimensional

expansion in the public sector, as may be seen from Table 9 and Table 10.

Table 9 Public Sector Expansion, Selected Indicators, 1970–1985

Public expenditure First Malaysia Plan 1966–1970 (pre-NEP) RM4.6 billion Second Malaysia Plan 1971–1975 RM10.3 billion Third Malaysia Plan 1976–1980 RM31.1 billion Fourth Malaysia Plan 1981–1985 RM48.9 billion

Development expenditure as % of GDP 1971 8.5% 1980 14.4%

Public sector employment (excluding military and police personnel) 1970 139,467 employees 1983 521,818 employees

Number of state agencies and state-owned enterprises 1960 22 1970 109 1980 656 1985 1,014 Sources: Jomo (1990: 106, Table 5.1), Mehmet (1986: 9, Table 1.3; 133, Table 6.1)

27 Some of the best known of these “trustee” agencies were Bank Bumiputera, Urban Development Authority (UDA), Perbadanan Nasional (Pernas, or National Corporation), Permodalan Nasional Berhad (PNB, or National Equity Corporation), Amanah Saham Nasional (ASB, or National Unit Trust Scheme), and the state economic development corporations (SEDCs) (Searle 1999: 61-66, Gomez and Jomo 1997: 29-39).

42

Table 10 Public Sector Development Expenditure, Malaysia Plan (MP) Periods 1971–2005

1971–75a (2nd MP) 1976–80b (3rd MP) 1981–85b (4th MP) 1986–90 (5th MP) RM million % RM million % RM million % RM million %

Economic 4,946.52 66.71 13,570.59 64.01 28,042.13 60.54 22,886 64.8 Agriculture, rural devt 1,793.53 24.19 4,672.41 22.04 7,540.90 16.28 7,325 20.8 Mineral resource devt 0.56 0.0 15.70 0.07 27.79 0.06 43 0.1 Commerce & industry 1,433.20 19.33 3,246.21 15.31 6,308.78 13.62 3,981 11.3 Transport 1,233.92 16.64 2,842.75 13.41 6,989.69 15.09 6,823 19.3 Communications 174.93 2.36 1,252.71 5.91 2,422.54 5.23 792 2.2 Energy & utilities 285.86 3.86 1,582.52 7.46 4,571.78 9.87 918 2.6 Feasibility studies, R&D 34.42 0.46 59.12 0.28 180.65 0.39 337 0.9

Social 1,286.74 17.35 3,635.99 17.15 9,972.69 21.53 8,764 24.8 Education & training 695.52 9.38 1,548.18 7.31 4,687.59 10.12 5,700 16.1 Health & population 183.25 2.47 307.40 1.45 736.51 1.59 931 2.6 Information, broadcasting 85.23 1.15 69.10 0.33 83.39 0.18 20 0.1 Housing 166.01 2.24 1,291.04 6.04 3,934.89 8.49 1,452 4.1 Other areas 156.33 2.11 420.27 1.98 530.31 1.14 661 1.9

Security 1.021.98 13.78 3,529.80 16.65 7,494.78 16.18 2,527 7.2 Administration 149.95 2.02 465.32 2.19 810.60 1.75 1,123 3.2

Total Federal government 7,415.09 100 21,201.90 100 46,320.00 100 35,300 100 State governments 1,318.61 2,093.42 6,268.00 8,850 Statutory bodies & NFPEs 1,059.51 1,641.83 27,743.00c 17,700c

Total public sector 9,792.81 24,937.15 80,331.00 61,850 a Federal Government only. b Estimated expenditure. c NFPEs only. Sources: Malaysia (1981: 118–25, Table 6-2); Malaysia (1986: 226–227, Table 7-2); Malaysia (1991: 60, Table 2-2; 62, Table 2-3)

43

Table 10 (contd) Public Sector Development Expenditure, Malaysia Plan Periods 1971–2005

1991–95 (6th MP) 1996–2000 (7th MP) 2001–05 (8th MP) RM million % RM million % RM million %

Economic 27,212 50.6 47,171.9 47.6 50,514.6 45.9Agriculture & rural devt 6,344 11.6 8,139.3 8.2 7,860.0 7.1Mineral resource devt 50 0.1 40.8 0.0 50 0.0Commerce & industry 4,047 7.4 11,257.8 11.4 10,295.4 9.4Transport 12,270 22.4 20,826.2 20.0 21,818.9 19.8Communications 70 0.1 47.0 0.0 146.5 0.1Energy & public utilities 829 7.8 5,543.1 5.6 8,590.0 7.8Feasibility studies & R&D 669 1.2 1,317.7 1.4 1,753.8 1.6

Social 13,555 24.8 31,284.0 31.6 37,518.1 34.1Education & training 7,315 13.4 19,724.1 19.9 22.660.0 20.6Health & population 2,387 4.4 3,725.5 3.8 5,500.0 5.0Information, broadcasting 108 0.2 192.3 0.2 254.1 0.2Housing 1,825 3.3 3,330.8 3.4 4,223.3 2.8Other areas 1,920 3.5 4,311.3 4.4 4,880.7 4.5

Security 10,987 20.1 11,644 11.8 10,750.0 9.8Administration 2,451 4.5 8,937.1 9.0 11,217.3 10.2

Total Federal government 54,705 100.0 99,037.0 100.0 110,000.0 100.0State governments 14,404 4,372 34,018.0Statutory bodies/NFPEs 48,549c 119,468c 109,337.0c

Total public sector 132,062 222,877 253,355.0Sources: Malaysia (1981: 118–25, Table 6-2); Malaysia (1986: 226–227, Table 7-2); Malaysia (1996: 175, Table 6-1);

Malaysia (1999: 143, Table 5-1); Malaysia (2001: 160, Table 6.1; 164, Table 6-3); Malaysia (2006: 56, Table 2-6)

44

Significantly, the character of the public agencies was also diversified. Upon independence, the state was served by a limited range of departments. Later, statutory bodies and agencies were established to undertake particular tasks of development, including large-scale irrigation works, Green Revolution schemes, ‘growth pole’ land settlements, and urbanization projects. At different times, different ministries – of rural development, primary commodities, international trade and industry, for example – or specialized statutory bodies – for land settlement, state economic development, regional development, and urbanization – were responsible for particular or particularly important tasks. At specific moments, government agencies and corporations such as MARA (People’s Council of Trust), Pernas (National Corporation) and Permodalan Nasional Berhad (National Equity Corporation) played important roles in advancing the social and economic aspects of NEP restructuring and affirmative action. Yet another large category of state-owned enterprises – including ‘Off-Budget Agencies’ later renamed ‘non-financial public enterprises’ (NFPEs), and companies established by state economic development corporations – showed an ‘increasing involvement of the public sector in national economic activities’ that ‘contributed towards economic growth and the NEP objectives’.28 Table 12 shows a list of 35 major NFPEs of the late 1980s. During the Fourth Malaysia Plan period (1981–85), the NFPEs accounted for 18 per cent out of a 48 per cent public sector share of total investment (Malaysia 1986: 224). Collectively, these public agencies and state-owned enterprises (SOEs) penetrated all sectors of the economy, as may be inferred from Table 11.

Table 11 Public Enterprise Involvement in the Economy 1960–1992

Sector/Industry 1960 1965 1970 1975 1980 1985 1992Agriculture 4 5 10 38 83 127 146Building & construction 2 9 9 33 65 121 121Extractive industries 0 1 3 6 25 30 32Finance 3 9 17 50 78 116 137Manufacturing 5 11 40 132 212 289 315Services 3 6 13 76 148 258 321Transport 5 13 17 27 45 63 68Others 0 0 0 0 0 6 9Total 22 54 109 362 656 1,010 1,149Source: Rugayah (1995: 66, Table 3.2) Promises of privatization

After more than a decade of economic intervention, however, the state’s multiple roles had produced corresponding contradictions. An unabated provision of opportunities had created what the state leaders would periodically deplore as a Malay dependence on the state.29 The strict regulation and aggressive restructuring of business had caused a rupture between the state, and domestic and foreign capital. As state investments proliferated, under dubious oversight and ahead of managerial capacity,

28 See Malaysia (1986: 225) for a list of 35 major NFPEs of the 1980s which included public utility boards, ‘commercial and industrial public authorities’, and ‘public authorities belonging to the socio-economic category’. 29 One does not like to ethnicize such an issue. Yet, the local discourses of Malay politicians and intelligentsia most often cast the problem as a ‘subsidy mentality’ and most crudely likened it to a ‘crutch’.

45

SOE inefficiency and mismanagement became manifest. And acquiring assets ‘in trust’ placed the bureaucracy and its corporate appendages in direct competition with an emerging class of Malay capitalists.

The early ‘Mahathirist’ policies – bureaucratic reform, the assimilation of Islamic values, Malaysia Incorporated and privatization – attempted to solve those problems and change the interventionist state of NEP design into a variant of the East Asian developmental state.30 Mahathir was ambivalent towards state expansionism. He favoured intervention to implement social engineering. But, long contemptuous of bureaucratic inefficiency, he was persuaded by the private sector’s supposed dynamism. The HI programme, as with late industrialization elsewhere in East Asia, had a strong nationalist impulse, but also a capitalist impetus that went beyond the ethnic fixations of many NEP advocates. Domestic capital, too, had changed. While NEP had not quite created an independent class of Malay capitalists, it had produced Malay entrepreneurs and technocrats with business experience, or what was officially termed a ‘Bumiputera Commercial and Industrial Community’ (BCIC). Thus, Mahathir’s ‘Malaysia Incorporated’ and ‘Privatization’ policies were meant to establish a new state-capital alliance. Malaysia Inc. promised cooperation between the state and a national capital; crucially the latter was no longer synonymous with domestic Chinese capital. Originally, privatization was justified as the means to reduce the fiscal burden of supporting unprofitable public enterprises and to improve the economic performance of existing state monopolies. Subsequently, privatization effectively served as the mode of transfer of corporate assets ‘held in trust’ to Malay entrepreneurs. Later still, the policy was intended to transfer far more of the responsibility for investment and growth to the private sector. With Malaysia Inc. and the practices of privatization, therefore, the state was planning to replace the bureaucracy and its SOEs with the private sector as the vanguard of development strategy.

As such, unlike in certain debt-stricken economies, privatization as a major policy did not begin in Malaysia as a measure of externally imposed structural adjustment. The option of deploying public enterprises in what might be called an ‘industrialize and privatize’ strategy had been anticipated two decades earlier:

The major difficulty in the Federation [Malaya] would appear to be the ideology of the government, but even this need not be an obstacle, as public enterprises can, after pioneering industrial development, be sold off to private enterprise, if a government so insists, as in the well known case of Japan (Wheelwright 1965: 113).

Yet, the state found it more than convenient to turn towards to the private sector during the recession of 1985–86. Mahathir and Minister of Finance Daim Zainuddin forced an ‘austerity drive’ on the bureaucracy and the SOEs, cut public spending (but not on HICOM projects) and looked for new sources of private investment and growth. Indeed, the state looked especially to employment-generating manufacturing FDI which

30 Of course, the variant deviated from the classic developmental state. For instance, the NEP’s restructuring to spawn a Malay capitalist class, the ethnic peculiarities of the political system, and the chronic dependence on FDI prevented industrial policy and economic management from being controlled by a talent-laden bureaucracy that was immunized from political influence.

46

fortuitously met the state’s expectations and helped to produce an economic recovery (which will be discussed in a later section) that seemed to vindicate the state’s faith in the virtues of the private sector.

Privatization was accordingly ‘entrenched in the policy matrix’, and by 1991, a

Privatization Masterplan had been completed, the scope of which portended a ‘radical shift to the private sector’ (Adam and Cavendish 1995b: 135). Justified in recession and praised for recovery, privatization was set to pave the ‘way forward’ for Malaysian development. The practice of privatization came to encompass the sale of profitable state monopolies (in energy and telecommunications, for example), the award of large infrastructural works (the North-South Highway and the Bakun Hydroelectric Power project being the largest), and the opening of new areas (social services such as health care and tertiary education) to domestic capital. To the extent that more and more sectors, companies and projects passed into private hands, privatization entailed rolling back the frontiers of the state. But privatization did not operate under market conditions. Huge privatization projects were awarded without open competition, and often without any tendering process at all.31 In this tightly controlled and ‘politically constructed market’, rent-seeking behaviour and money politics were rife as coalitions formed around domestic conglomerates and powerful politicians who competed to become privatization’s chief beneficiaries. Leading and following capital

Hence, Malaysia Inc. came to stand for power alignments, a corporate structure, and a governance framework within which the state ‘picked winners’ from a new category of politically connected Malay, non-Malay, or, sometimes, interethnic conglomerates. These domestic conglomerates were positioning themselves to be privileged oligopolies.32 They generally did not manufacture for the world market where success relied on international competitiveness that was itself derived from technological innovation, research and development, efficient production and effective marketing. Some of them operated in primary-commodity production that could trace its competitiveness to colonial times. Others were active in resource-based industries where local sourcing was an obvious strength and local innovation a reality (as in the notable example of palm oil-based downstream activities). The majority of the conglomerates, however, congregated in banking, resource exploitation, construction, property and real estate, gaming, tourism, transport, utilities and services, and selected import-substituting industries. These were precisely the sectors in which state policies, support and protection made the difference between success and failure. The conglomerates adopted an almost standard strategy of business expansion (though not necessarily in the following order of activity): deal in property and real estate, build up construction capacity, lobby for infrastructural and utility works, secure a banking or finance arm or a brokerage licence, buy up plantations, diversify into tourism, and enter newly privatized areas like telecommunications and social services. In time that strategy dictated the ‘contemporary conglomerate style of growth’ that increasingly involved ‘mergers, acquisitions and asset-stripping, with scant regard for relevant experience and

31 See Jomo (1995: 44–48) for a discussion of the cases of the North-South Highway, Sistem Televisyen (Malaysia) Berhad, Sports Toto, Pan Malaysian Sweeps, Totalisator Board of Malaysia, Jalan Kuching-Jalan Kepong Interchange, Indah Water Konsortium, Bakun Hydroelectric Project, Food Industries of Malaysia, and Peremba Berhad. 32 For some excellent profiles and case studies of the conglomerates see Gomez (1990, 1994) and Searle (1999).

47

expertise’ and that reflected ‘the greater attention to financial accumulation rather than the difficult but ultimately necessary development of internationally competitive productive capacities’ (Gomez and Jomo 1997: 179-80). Thus did the state come to choose the conglomerates for its developmental vanguard, after the fashion of the Japanese and South Korean preferences for the zaibatsu and chaebol respectively, instead of the Taiwanese reliance on small and medium enterprises (SMEs). For the conglomerates as a whole, the policies favouring stable foreign exchange rates, ample credit, low interest rates – while not quite constituting ‘repression’ in Malaysia’s increasingly liberalized financial system – would clearly be a boon.

With the apparent success of its sponsorship of the conglomerates, the state had

come a long way from the interventionist days of the early NEP period when the state advanced with capital in tow. Now, where the state pushed new development initiatives, it usually did so in alliance with national capital, and, where feasible, foreign capital. Hence, consultative councils and meetings, such as the Malaysian Business Council, Malaysian Industry-Government Group for High Technology, and the International Expert Panel for the Multimedia Super Corridor became the more influential they more they were tasked with passing ideas and initiatives between state and capital. In general, the bureaucracy was responsible for technocratic planning and ‘to serve the private sector’ in new avenues of development and growth. That was surely so when the state revealed its hopes for a Multimedia Super Corridor that would draw together state, national capital and foreign capital in a futuristic high-technology hothouse plan. It was no coincidence surely that Mahathir would reveal his Vision 2020 before the inaugural meeting of the Malaysian Business Council prior to popularizing it among society at large.

At times, the state would follow capital’s lead, as when ‘good ideas’ from the

conglomerates were ‘rewarded’ with privatization projects but not disciplined with the kinds of performance criteria and targets that the South Korean state imposed on its chaebol. The conglomerates progressively assumed characteristics that have been variously described as rentierist (Gomez and Jomo 1997), distributional-coalitionist (Mehmet 1986), or simply cronyist. Powerful corporate figures, their political allies (notably within UMNO) and senior bureaucrats would join to secure more and more privatized projects. In the process, they intensified the politicization of commerce, and the commercialization of politics to the point of destabilizing the ruling party itself. Former Deputy Prime Minister Musa Hitam was once moved to say that the situation had ‘got to the stage when the private sector was dictating terms, telling government what to do based on their links to leadership’ (Jayasankaran and Hiebert 1998: 14).33 Conglomerate oligarchy

Subsequent evaluations of conglomerate culpability for the 1997 crisis would stress its origin in state cronyism, shoddy governance and lax oversight of the financial system. But in the pre-crisis 1990s, the conglomerates were far from being dismissed as unprofitable cronyist creatures. If anything, their rise was emblematic of a successful path of development that made them highly attractive to foreign investors. One indicative list of ten major KLSE-listed companies in 1995 showed foreign-owned equity shares in them that ranged from about 9 to 30 per cent, with HICOM’s very low foreign equity share being an exception (Menon 2000: 36). However, market and 33 By ‘leadership’ Musa meant the Prime Minister. Mahathir had so centralized, sometimes personalized, decision- and policy-making that business circles took it as a truism that gaining his confidence was a necessary part of good business practice.

48

neoliberal criticisms in particular largely ignored a critical implication that stemmed from the relationship between privatization as policy, the consolidation of an oligarchy of domestic capital, and the later failings of the conglomerates. In effect, privatization and the cronyistic-rentierist conduct it encouraged and the oligarchy it supported basically meant an elite capture of policy, although its specific expressions and implications for development strategy could not be readily documented. 34 Consequently, it might be observed of the conglomerate-dominated economy in general what was once remarked of the difficulty of implementing industrial policy in particular, that is:

The bureaucracy in Malaysia may be too weak relative to a strong rentier class based in the dominant political groups to bring about the emergence of an efficient, ‘deepening’, industrial policy in Malaysia. In other words, the ‘social structure of accumulation’ in Malaysia may prevent the emergence of an efficient, industrial policy administered on South Korean lines – and yet what is needed in an industrial policy which will break down the dualism which has developed in the Malaysian manufacturing industry (Edwards 1995: 36). Thus, one can only speak of a Malaysian variant of the East Asian

developmental state with some irony: the state chose to discipline its bureaucracy and was strong and authoritarian in immunizing its decision-making from popular pressures. But, the state proceeded to immunize the conglomerates from stern bureaucratic oversight. That had its ideological expression, too. The consolidation of a conglomerate oligarchy heralded a shift in the state’s narrative of development. In the heyday of NEP, the state prioritized poverty reduction and restructuring. When NEP was held in abeyance, the state turned to growth before distribution. But in the developmental narratives of pre-crisis 1990s, state policies had come to privilege not poverty eradication, not even restructuring perhaps, but the aggrandizement of wealth. Here, too, it was glorious to be rich, especially when corporations could grow on relatively easy access to banking loans. In 1998, the ratio of bank credit to GDP reached 148%, from 85.2 per cent in 1985 (BNM 1998: 130), an earlier moment of financial crisis. In contrast, private debt securities were comparatively low at 26.9 per cent of GDP such that BNM would acknowledge, in a time of crisis, ‘the need to diversify the risks away from the banking system and allow investors to assume a higher share of risks later’ (BNM 1998: 130–31). V. Openness and Liberalization

On the eve of the July 1997 crisis, it might have been said that the development strategy that brought a rapid recovery from recession had taken full advantage of the openness of the economy. Indeed, the economy, never subjected to threats of nationalization, has customarily been quite open to trade, investment flows, the transfer of technology, and even the ideas for economic development. Of course, an open, relatively small, and highly export-dependent economy would be vulnerable to the ‘vagaries of world trade’ – the fluctuations in global economic growth, changes in demand for commodities and manufactured goods, shifts in the terms of trade for exports and imports, and cycles of instability within the world economy. By and by, the 34 But this may have become more blatant. In recent state plans for the development of several ‘corridors’ in Peninsular Malaysia, the leading role, including important roles in planning and implementation, appeared to have been directly assigned to selected conglomerates.

49

‘vagaries of world trade’ encompassed not just goods and services but a trade in money and foreign exchange. Recession’s impact In 1985, continued development faced serious problems when the economy contracted by 1.0 per cent, and only grew by 1.2 per cent in 1986. Three factors were principally responsible.35 First, there was a large across-the-board decline in world prices of commodities (including petroleum). After their threefold increase in 1975–1980, Malaysia’s commodity export earnings were only RM37.6 billion in 1985 instead of the RM63.1 billion forecast by the economic planners. Second, there was an escalation in public debt. Public debt had risen from RM34.16 billion in 1981 to RM87.06 billion in 1986 owing to NEP-based deficit spending, the HICOM projects, and the post-Plaza Accord yen appreciation. Third, there was a reduction in the government’s development expenditure just when total private investment declined. Development expenditure was RM6.756 billion in 1985 and RM7.521 billion in 1986 compared with RM11.189 billion for 1982. Total private investment fell from RM13.3 billion in 1984 to RM10.1 billion in 1986, while foreign corporate investment fell from RM3.26 billion in 1982 to RM1.73 billion in 1985, and RM1.26 billion in 1986.

The recession’s impact, severe all round, was particularly damaging to state-dependent Malay businesses when austerity measures, including a job- and wage freeze, and cuts in development expenditure, were imposed on the bureaucracy and SOEs. From 1985 to 1987, the investment regime was rapidly liberalized to attract private investment, stimulate growth and generate employment. The range and scale of business incentives grew, initially for foreign capital, but later for domestic (non-Malay) capital, too. September 1986 brought a major policy shift: the NEP was ‘held in abeyance’. It meant dismantling (subject to certain conditions related to orientation of production, size of investment or reinvestment and employment potential) the NEP’s limits on foreign equity ownership.36 The liberalization coincided with moves by Japanese and other East Asian MNCs to relocate part of their production because of the post-Plaza Accord appreciation of their national currencies, an anticipated loss of the Generalised System of Preferences (GSP) privileges, and escalating domestic labour and production costs. Liberalising FDI

Some advantage came from the exchange rate. It was evidently ‘long-held policy not to resort to exchange rate changes to gain competitive advantage, not to respond to transient and short-term currency movements that could easily be reversed’ (BNM 2001: 102). But, it has been suggested, that between 1981 and 1984, the ringgit was ‘propped up by the sharp rise in borrowing from overseas to finance the heavy industrialization programme’ (Edwards 1995: 33). Subsequently, BNM maintained a stable exchange rate (of between US$1 = RM2.41–2.60), thus ‘the rate depreciated following realignment of yen-US$ rate under the Plaza Accord’ (BNM 1998: 32), resulting in a real depreciation of the ringgit of about 30 per cent between 1985 and 1989 (Table 12). 35 See Jomo, Khoo and Chang (1996: 80–81. 36 Mahathir promised that investors who came to Malaysia’s aid then would never be required to restructure.

50

Table 12 Real Effective Exchange Rate (REER) Index 1960–90

Year REER Indexa Year REER Index Year REER Index 1965 100 1974 89 1983 87 1966 95 1975 76 1984 90 1967 92 1976 79 1985 85 1968 86 1977 80 1986 68 1969 87 1978 76 1987 68 1970 81 1979 83 1988 61 1971 75 1980 82 1989 61 1972 73 1981 80 1990 57 1973 86 1982 82

a Based on 1965 = 100; a decline in the index means Malaysia became more competitive vis-à-vis its trading partners. Source: Edwards (1995: 38, Table 4)

Significantly, from 1985 to 1995, the ringgit (in a quasi peg to the US dollar) depreciated steadily against the Japanese yen and other major Asian currencies. For example, the ringgit was traded at about RM1 to ¥100 in 1984 but depreciated to about RM1 to ¥53 in 1990 and at RM1 to ¥39 in 1994 (Jomo 2001a: 6, Table 1.1). The policy, currency and external factors – respectively the investment liberalization policy, the foreign exchange rate decline, and the East Asian MNCs’ plans for relocation of production – combined to attract FDI. Indeed a new influx of FDI raised the share of FDI in gross domestic investment from about 10.7 per cent at the end of the 1980s to about 24.6 per cent in 1991–93 (Rasiah 2001b: 48). East Asian FDI was prominent in this new wave of foreign investment, with Japan, South Korea and Taiwan accounting for respectively 21.7, 10.7 and 21.2 per cent of all FDI inflows in 1991 (Menon 2000: 36).

The FDI surge, coupled with an improvement in commodity prices, contributed

to another spell of export-led and investment-driven growth that would practically last until July 1997. With the economic programme envisaged by Vision 2020 requiring accelerated growth and larger infusions of investment in different sectors, investment levels in the pre-crisis 1990s exceeded national savings that had already reached much higher levels than in earlier periods (Table 13). The Sixth Malaysia Plan had projected a strong resource position, based on the mobilization of high levels of savings, that would leave a small resource gap (of –0.8 per cent of GNP) to be met by foreign capital inflows (BNM 1996: 34, Table III.I). But the actual resource gap for the Sixth Malaysia Plan period turned out to be –6.8 per cent of GNP, with the private sector savings-investment gap reaching an all-time high of –10.1 per cent of GNP (Table 13). Indeed, total investment peaked at 45.7 per cent of GNP in 1995, with the private sector savings-investment gap being –12.7 per cent of GNP (Malaysia 1999: 49, Table 2.6). Only the Fourth Malaysia Plan period of 1981–85, with its initial counter-cyclical spending and the HICOM project launches, had a larger resource gap (in terms of percentage of GNP) than the 1991–95 period. Only in 1998, with the financial crisis leading to economic recession, would investments decline sharply to 27 per cent (Malaysia 1999: 48).

51

Table 13 Savings and Investment as Proportions of GNP

Malaysia Plan Periods 1971–2005 1971–75 1976–80 1981–85 1986–90 1991–95 1996–

2000 2001–05

Private sector Savings 18.4 22.7 18.1 21.9 16.6 22.4 21.0Investment 16.5 17.1 18.3 18.7 26.7 22.8 9.6Balance 1.9 5.6 –0.2 3.2 –10.1 –0.4 11.4Public sector Savings 2.4 7.3 9.0 9.1 17.4 17.1 15.3Investment 7.8 10.3 17.3 11.1 14.1 12.6 14.0Balance –5.4 –3.0 –8.3 –2.0 3.0 4.5 1.3Total Savings 20.8 30.0 27.1 31.0 34.0 40.1 36.3Investment 24.4 27.4 35.6 29.8 40.8 33.6 23.6Resource gap –3.6 2.6 –8.5 1.2 –6.8 6.5 12.7Sources: BNM AR (1996: 34, Table III.I); Malaysia (1981: 26, Table 2-5); Malaysia (1986: 74, Table 2-15); Malaysia (1991: 25, Table 1-5); Malaysia (1999: 49, Table 2-6); Malaysia (2001: 38, Table 2.7); Malaysia (2006: 54, Table 2-4)

Hence, if openness, in the forms of fluctuating commodity prices, and an externally induced foreign exchange impact on public debt servicing, was injurious to the economy, yet the state’s solution to recession’s problems lay in displaying even more openness by further dismantling barriers to FDI. The FDI inflows which were attracted during this period reached a peak in 1992–93 of 8.7 per cent of GDP, with about half of the FDI being made up of retained earnings (BNM 2000: 55). From 1990 to 1997, 65 per cent of FDI was channelled to manufacturing (BNM 2000: 55) thus enabling manufacturing to dominate the export sector.37 Not for the first time then did the state’s interface with the world economy converge in foreign capital. FDI was enlisted at the commencement of the NEP. This time, however, FDI was drawn to combat recession, albeit with a sacrifice of (some features of) the NEP’s restructuring. Engaging the global financial market

Perhaps some policy-makers expected that more openness, in the guise of liberalization and deregulation, would facilitate future economic management. Since the late 1980s, the financial system had been reformed to liberalize the capital market, support its growth, and introduce some competition (Ariff 1996: 328-31, Financial Times 1995: 195-201, Zainal et al 1996: 318).

By the 1990s, the state had installed some of the physical, institutional and statutory infrastructure to transform Malaysia into a regional financial centre. An International Offshore Financial Centre was established in Pulau Labuan which accommodated foreign banks that had been granted offshore banking licenses by the central bank, Bank Negara Malaysia (BNM). There were additional plans to establish an International Stock Exchange and Monetary Exchange in Labuan and to use the International Offshore Financial Centre to provide expertise in various forms of Islamic offshore financial products. There was a growing Private Debt Securities market dealing 37 Some MNCs had moved into ISI activities in the1980s, ‘manufacturing simple consumer and intermediate goods such as electrical household appliances and assembly of electronic components, cars and motocycles’ (BNM 2000: 56).

52

in bonds, warrants and notes that called for the services of another domestic rating agency. By the end of 1996, the Kuala Lumpur Options and Futures Exchange and the Malaysia Monetary Exchange were to be operational. As part of the broadening financial liberalization, the single largest savings fund, the Employees Provident Fund, traditionally required to invest its assets with prudence, had been allowed a greater scope of participation in the capital market. Stock brokering houses could operate unit trust funds and a graduated commission system would offer more competitive brokerage charges, while foreign fund management companies could manage 100 per cent of their funds locally. The Kuala Lumpur Stock Exchange (KLSE) would accept the public listing of large privatized infrastructural projects, such as the construction of new ‘toll highways’, and the generation of electricity by selected ‘independent power producers’ (who then sold the electricity to Tenaga, the national electricity corporation).

The state’s policies to upgrade the domestic capital market and tap it for

investment funds constituted a calculated engagement of the state’s developmental priorities with the globalization of securities trading. For each year between 1991 and 1997, in fact, foreign borrowings and other capital inflows financed current account deficits that ranged from a low of 4.4 per cent of GDP in 1992 to a high of 12.8 per cent in 1995 (Jomo 2001b: 164, Table 5.14). Clearly, the liberalization and expansion of the financial sector would benefit the conglomerates most: they required funds for their own rapid expansion and they were best positioned to enter the emerging areas of financial services. Two measures of liberalization turned out to be critical. First, the liberalization of the capital account facilitated the inflows of portfolio investment funds which treated Malaysia’s financial and securities market as one of the world’s ‘emerging markets’. Second, the state had relaxed the regulations governing private sector foreign borrowings. Thus, as the state trimmed it own foreign debt between the two moments of recession, that is, 1985 and 1988, the private sector’s external indebtedness rose (Table 14).

II. Table 14

Financing the Economy, Selected Years 1985 1990 1998 1985 1990 1998 Amount (RM billion) % of GDP

Domestic debt 106.8 190.3 562.4 137.8 164.5 201.8Private 66.0 120.3 469.4 85.2 103.9 168.4Private debt securities – 6.2 74.9 – 5.4 26.9Public 40.8 70.0 93.0 52.6 60.5 33.4

External debt 42.5 45.9 159.8 54.8 39.7 57.3(1) Long-

term

42.5 41.5 131.3 54.8 35.9 47.1

Private 7.2 4.9 63.1 9.3 4.3 22.6Public 35.3 36.6 68.2 45.5 31.6 24.5

(2) Short-

term

– 4.4 28.5 – 4.8 10.2

Private – – 8.8 – – 3.1Bank – 4.4 19.7 – 3.8 7.1

Total debt 149.3 236.2 722.2 192.6 204.1 259.3

53

Total deposits of the banking system 73.0 120.8 431.4 94.2 104.4 154.8Source: BNM AR (1998: 131, Table 3.2)

Moving with capital

Moreover, the ringgit’s quasi peg to the US dollar offered a measure of stability for domestic borrowers of foreign funds as well as portfolio investment. Thus, external loans portfolio investment contributed to economic expansion by financing several of the state’s ‘mega projects’ – the Kuala Lumpur International Airport, the Bakun Hydro-Electric Power project, the new administrative capital at Putrajaya and the Twin Towers – and the conglomerates’ expansion, and boosting the market capitalization of the KLSE.

From 1988 to 1990, the private sector’s medium and long-term external debt

was less than RM5 billion. Thereafter, from 1991 to 1997, the medium and long-term external debt grew from RM6.723 billion to RM62.081 billion, that is, at an average annual rate of 14.9 per cent (Table 14). Within the same period, the short-term debt rose from RM7.171 billion to RM43.257 billion, or at an average annual rate of 11.9 per cent ((Table 15).

Table 15 Outstanding Private Sector External Debt 1987-2004

Year

Medium and long-term debt (RM billion)

Short-term debt (RM billion)

1987 5.559 n. a. 1988 4.855 2.464 1989 4.613 3.343 1990 4.943 4.415 1991 6.723 7.171 1992 10.471 13.157 1993 15.498 17.320 1994 24.203 14.244 1995 28.080 16.204 1996 32.973 25.170 1997 62.081 43.257 1998 67.991 35.820 1999 64.315 22.427 2000 65.077 17.600 2001 57.604 24.072 2002 52.612 32.435 2003 56.232 33.571 2004 58.874 43.997

Source: BNM MSB (2005: 126, Table VIII.11).

In the five years from 1992 to 1996, the securities market received net inflows of portfolio funds although the size of the inflows fluctuated between a peak in 1993 and rather lower levels in other years (Table 16).

These inflows, mostly channelled to the stock market, contributed to the KLSE’s

massive expansion between 1991 and 1996 (Table 18). Foreign portfolio investments

54

accounted for a minority – but large minority – share of KLSE capitalization (with estimates of foreign equity ranging from 25 to 40 per cent). By 1997, the portfolio funds had already exerted a disproportionately high impact on market movements because of the greater activity and higher magnitude of their transactions, and their pronounced influence over investor sentiment.

Table 16 Portfolio Investment in Shares and Corporate Securities 1991-2004

Year Receipts (RM million)

Payments (RM million)

Net inflow (RM million)

1991 13,645 15,524 - 1,879 1992 33,324 26,481 6,843 1993 116,743 92,076 24,667 1994 129,953 115,521 14,432 1995 90,987 85,642 5,345 1996 127,590 120,899 6,691 1997 113,212 138,675 - 25,463 1998 40,846 42,309 -1,463 1999 33,266 32,747 519 2000 44,645 51,616 -6,971 2001 24,112 26,670 -2,558 2002 38,169 39,319 -1,150 2003 52,408 44,108 8,300 2004 76,169 60,437 15,732

Source: Bank Negara (2005: 140, Table VIII.16)

Table 17 Kuala Lumpur Stock Exchange, Selected Indicators 1990-2004

Year

Composite Index

Turnover

(RM billion)

Number of listed

companies

New share issues (RM

billion)

Market capitalisation (RM billion)

1990 505.92 29.522 285 9,463.5 131.66 1991 556.22 30.097 324 3,160.4 161.29 1992 643.96 51.469 369 9,546.3 245.82 1993 1,275.32 387.276 413 3,440.7 619.64 1994 971.21 328.057 478 8,228.7 508.85 1995 995.17 178.859 529 13,057.9 565.63 1996 1,237.96 463.265 621 14,958.0 806.77 1997 594.44 408.558 708 17,523.2 375.80 1998 586.13 115.181 736 1,661.6 374.52 1999 812.33 185.250 757 6,466.5 552.69 2000 679.64 244.054 795 5,909.5 444.35 2001 696.09 85.012 812 4,416.6 464.98 2002 646.32 116.951 865 12,883.4 481.62 2003 793.94 183.886 906 7,667.5 640.28 2004 907.43 215.623 963 3,442.1 722.04

Source: BNM MSB (2005, December: 80, Table V.12; 82, Table V.14)

55

VI. Crisis and semi-autarky

The conjuncture of conglomerate consolidation, the liberalization of the investment regime and the financial sector, and economic expansion seemed to prove the sagacity of the development strategy. And yet, there were already some market-based misgivings about the strength of the economy, the key financial indicators of which are given in Table 18.

Table 18 Key Financial Indicators 1994–1997

Annual change (%) Key Indicator 1994 1995 1996 1997

Real GDP 9.2 9.5 8.6 7.8Inflation rate 3.7 3.4 3.5 2.7Gross exports 27.0 20.2 6.5 12.4Gross imports 32.8 24.6 1.5 12.0Total external credit 6.1 15.8 16.3 68.2Short-term capital flows (RM billion) −8.5 2.5 10.3 −14.2Real effective exchange rate −3.5 −0.1 4.5 −24.5Domestic credit expansion 16.5 28.3 27.6 26.5Stock market capitalization 17.9 11.2 42.6 −53.4Ratio of private credit to nominal GDP 116.0 130.2 143.0 161.4Source: BNM AR (1997: 104, Table V.I), abridged. Hints of weaknesses

The current account deficits were persistent. Export competitiveness had declined partly due to the ringgit’s appreciation as the US dollar rose while the yen and the renminbi were devalued. Foreign debt had mounted partly to fund public expenditure on ‘mega projects’. An asset bubble had formed in real property and securities. Overheating loomed. More to the point, changes in the economic structure that strengthened the financial system’s influence over the real economy, policy biases that favoured rent-seeking, and a changing institutional structure that privileged the stock market raised the vulnerability of the financial system (Jomo, Liew and Kaehler 2001: 174). Still, no one foresaw the financial crisis of 1997–98 let alone the scale and rapidity of the regional meltdown that demonstrated that it was unsustainable to predicate continued high growth on mounting external loans and corporate debt-equity ratios, rising inflows of speculative capital, and inflexible commitments to ‘mega-achievement’.

For the state, the ringgit’s initial rate of depreciation following the collapse of

the Thai baht seemed like a market correction for an overvalued currency that should not have been alarming. There was some credence to BNM’s insistence that ‘economic fundamentals’ were strong, definitely more so than they were at the time of the 1985 recession (Table 19).

56

III. Table 19

IV. Key Macroeconomic and Financial Indicators

V. Two ‘Crisis Periods’

1984 1985 1986 1996 1997 1998Real GDP growth (%) 7.8 –1.2 1.2 8.6 7.7 –6.7CPI change (%) 3.6 0.4 0.6 3.5 2.7 5.3Unemployment rate (%) 8.3 6.9 8.8 2.6 2.6 3.9Federal government overall balance (% of GNP)

–6.4 –6.1 –11.2 0.8 2.5 –1.9

Current account balance (% of GNP)

–5.3 –2.1 –0.5 –5.1 –5.4 13.7

External debt (% of GNP) 50.1 59.0 75.6 41.5 65.4 60.9Debt service ratio (% of exports of goods and services)

11.8 15.8 18.9 6.9 5.5 6.7

Net international reserves (RM billion)

9.6 12.5 16.5 70.0 59.1 99.4

M3 growth (annual change, %) 15.6 9.8 8.8 21.2 18.5 2.7Banking system deposits (annual change, %)

20.7 10.6 7.5 26.3 21.3 –0.5

Banking system loans (annual change, %)

20.9 14.0 6.0 27.6 26.5 –1.8

3-month interbank rate (average, %)

9.39 7.74 6.41 7.34 8.60 6.48

Average base lending rate (commercial banks, %)

12.25 10.75 10.00 9.18 10.33 11.8

Risk-weighted capital ratio of banking systema (%)

6.8* 7.5* 7.0* 10.6 10.6 11.8

Non-performing loansb/ total outstanding loans (%)

n.a. n.a. n.a. 3.7 4.1 7.6

Movement of RM against composite (%)

+1.8 –8.6 –13.7 +2.6 –31.4 –0.2

a Minimum requirement of 8% based on Basle Capital Accord. * Commercial banks only (Pre-Basle Capital Accord) – minimum requirement of 4% for domestic banks and 6% for foreign banks. b NPL classification based on individual banking institution’s policy – 3-month or 6-month classification. Source: BNM AR (1998: 37, Table II.I)

Initially BNM mounted a costly attempt to defend the ringgit but BNM quickly abandoned it, thus avoiding a repeat of Thailand’s depletion of its reserves in a forlorn defence of the baht. But with BNM’s decision to float the ringgit coming amidst a regional contagion, ‘the depreciation of the ringgit and the decline in share prices reinforced each other, creating a vicious circle … that further undermined confidence’ (BNM 1998: 34).

And here and now, further openness, liberalization and deregulation of the

financial system – the prescription of the International Monetary Fund, money market and economic orthodoxy – appeared to offer no solution, economically or politically.

57

The arrival of crisis

Even in hindsight, Malaysia’s experience of the regional meltdown was almost a surreal affair, as much dictated by vertiginous politics as influenced by irrational market conduct.38 Summarily, an embattled state confronted an unravelling money marke. The latter raised its demands for ‘pro-market’ reforms and even ‘regime change’. The former appeared to construct its crisis management from a raft of irrational statements, confrontational stances and self-destructive changes of investment rules. The consequence was an erosion of investor confidence that was ironic for a financial system that was widely acknowledged to have been better managed than in Thailand or Indonesia. The truly damaging result of the crisis was a capital flight towards the end of 1997 that turned into a foreign capital strike by mid-1998.

When austerity budgets were announced in October and December 1997, they

nudged the economy towards contraction. Up to February 1998, BNM tightened monetary policy by limiting credit growth, raising the banks’ statutory reserve requirements, raising interest rates, and reclassifying non-performing loans (NPLs) according to three months of non-payment instead of six months. Predictably, NPLs as a percentage of the banking sector’s loans rose – from 4.1 per cent in 1997 to 13.6 per cent in 1998. This raft of ‘conventional macroeconomic measures’ (BNM 1998: 14), for failing to reduce the continuing volatility in the money market, was ridiculed as Deputy Prime Minister and Minister of Finance Anwar Ibrahim’s ‘IMF package without the IMF’ after his fall.

Given its developmental ambitions, the state abhorred slower growth, lower

consumption, and stricter regulation. Given its political priorities, the state could not tolerate the collapse of strategic sectors and conglomerates, or, what amounted to the same thing, the transfer of their assets to foreign investors via market restructuring. But policy options were now limited. The time-consuming route of inviting FDI for long-term productive activity would not rescue the financial system from impending catastrophe. Initial hopes for an ‘Asian solution’ managed by a Japan-led ‘Asian Monetary Fund’ were dashed by the opposition of the USA, the IMF and even China. In addition to the standard IMF package of structural adjustment measures, including cuts in public spending and removal of price subsidies, the neoliberal prescriptions for the crisis were currency floats, higher interest rates, restrained liquidity, market liberalization, (domestic) financial sector reform, and ‘good governance’. Any of these remedies, stringently applied, would have been bitter medicine for an ailing conglomerate. Taken together, they would have been fatal to Malaysia Inc.: a ‘free market’ would govern a non-interventionist state. Controls over capital

Not openness then, at any rate not more financial liberalization and other ‘pro-market reforms’, but semi-autarky formed the strategic direction of crisis management. On 1 September 1998, BNM instituted a currency peg (at the rate of RM3.80 to US$1) and ended the free convertibility of the ringgit. Within a month, offshore trade in ringgit would not be permitted. Non-resident correspondent banks and stock brokering firms were prohibited from obtaining domestic credit facilities while residents could not obtain ringgit credit facilities from non-resident individuals. Non-residents were required to deposit their ringgit securities with authorized depositories, and to hold the

38 See Chapters 3 and 4 in Khoo (2003).

58

proceeds from the sale of such securities in external accounts for at least one year before converting them to foreign currency. BNM insisted that its ‘selective exchange controls’ would curb currency speculation but not affect the ‘general convertibility of current account transactions’ and ‘free flows of direct foreign investment and repatriation of interest, profits and dividends and capital’. The capital controls halted capital flight, if only by trapping remaining foreign funds for a year, and even reversed the flight, if only by forcing the return of offshore ringgit funds. The currency peg ended the volatility of the ringgit and gave domestic businesses and foreign direct investment a measure of stability by which to plan, contract and manage.

The capital controls presaged a policy regime of rescuing local business,

recapitalizing the financial sector, and reflating the economy. Many domestic conglomerates had developed in protected, non-tradable sectors yielding ringgit cash flows but they were overexposed to unhedged and bloated external loan repayments. Between 1997 and 1998, an estimated 58 per cent of the companies belonging to ten major conglomerate groups, and 42 per cent of other public listed companies suffered losses exceeding RM500 million each (Tan 2003: 36). For the conglomerates, the drastic currency depreciation, the KLSE’s precipitous falls (Table 16) and the money market’s capital flight (Table 15) ruled out any quick restoration of the conglomerates’ wealth by way of further loans, loan extensions and a recovery of share prices. Only the state’s active interventions held out any hope of averting a collapse of the financial and corporate sectors. To that end, the state established three institutions. Danaharta, an ‘asset management company’, was established by Parliament and empowered to acquire excessive NPLs from affected banks and financial institutions. Danamodal, a ‘special purpose vehicle’ backed by BNM, was charged with recapitalizing the banking sector. A Corporate Debt Restructuring Committee (CDRC) managed corporate applications for assistance in negotiating debt-restructuring arrangements between creditors and borrowers.

By the end of December 1999, Danaharta had reduced NPLs in the banking

sector to 12.4 per cent by purchasing a total of RM45.5 billion in NPLs while Danamodal had recapitalized the financial sector by supplying RM7.59 billion in credit to ten financial institutions (Mahani 2000: 191–92). The effect of these operations was to lessen the debt burden of the banks, increase their capital adequacy levels and enable them to continue lending to their customers (Low 2006: 116–18). The CDRC managed 67 debt-restructuring applications involving RM36.3 billion. The best-known applications were those involving the UMNO-owned Renong, the state-owned Bank Bumiputra, and Sime Bank. Recapitalization largely depended on three sources: public funds (notably the Employees Provident Fund and Petronas’s reserves), external loans (from Japan and the World Bank) and international bonds that were issued by the government and Petronas in 1999. In September 1998, the NPL classification was changed back from three months to six months of non-payment. BNM directed a higher target for bank lending and, by offering terms more favourable than those in July 1997, made credit more readily available to such key sectors as the automobile industry and the property market. BNM increased liquidity and lowered the banks’ statutory reserve requirements to four per cent in September 1998 from 13.5 per cent in February. In October, the base lending rate was reduced to 6.79 per cent from 12.27 per cent in June.

It is instructive, looking back, to see how closely the rescue policies addressed

the basic issues of the crisis, as Mahathir, with his political intuition, had articulated them less than three months before the capital controls were imposed:

59

If we were to follow the IMF any closer, we would bankrupt all of our companies. If you look at all the companies in the countries with the IMF, technically they are bankrupt. What the IMF wants us to do is to increase the interest rates, to reduce credit, to increase taxes. Now all three of these things would bankrupt our companies. When you reduce the currency by 50% and the share prices by more than 50%, then all of the companies find they cannot pay their debts, because they borrowed using their shares as collateral, on the basis of 80% of the value of the shares. Now the fall in shares has made the borrowing much bigger and they have to top up. Now how do you top up in a situation when the economy is not doing well? It is never easy to top up. If you cannot top up, our regulations say you will be considered to have a non-performing loan after six months – the IMF says no, it must be three months. But in three months they cannot pay. But if we do not follow the IMF, the result will be a loss in confidence and down goes the currency. So we have to follow. The result is a lot of loans that would not be non-performing become so. And once they become non-performing, companies cannot borrow. And when they cannot borrow, they cannot do business and we get worse (Time 1998).

Recovery and rapprochement

Whether the capital controls of September 1998 were necessary, or how effectively they aided economic recovery, stimulated a controversy that has not found a settled resolution in economic theory and analysis. But the capital controls, as policy in a time of crisis, did not constitute an economistic solution.39 In economic terms, the semi-autarkic regime of capital controls, recapitalization, rescue and reflation, which resisted neoliberal pressures for an unfettered money market, averted the financial collapse and IMF intervention that Thailand, Indonesia and South Korea had experienced. In political terms, it permitted the state to regain ‘a greater degree of monetary independence’ from the market, provide ‘an environment of stability’, ‘restructure the financial and corporate sector’ (BNM 1998: 36) – and, thereby, salvage its nationalist-capitalist project.

Economic recovery began in 1999, owing considerably to a region-wide

recovery and an expansion in exports (made more competitive by the depreciated ringgit) of mainly electronic goods to the USA. Within the country, part of the recovery was attributable to increased public expenditure. The state reversed a five-year of fiscal surplus and opted for fiscal deficits of 3.7 per cent of GNP for 1998 and 6.1% of GNP for 1999 (BNM 1998: 94) while targetting its expenditure on construction, health care and education. The state also encouraged consumption (which had declined under the initial impact of the crisis) by making credit more easily available for the purchase of houses and automobiles and by reducing taxes (and abolishing income tax for 1999). In 1998, loans for housing, construction and consumption constituted 35.2 % of all non-financial private sector credit (BNM 1998: 137, Table 4.4). By late 1999, current account surpluses had rebuilt the country’s reserves, and the reflationary policies had generated sufficient growth to restore unemployment to its low pre-crisis levels. Supported by domestic institutional funds directed by the state to invest more heavily in the KLSE, share prices had rallied from their lowest levels of September 1998.

This semblance of a return to economic stability led the state and the market towards a new compromise. The state relaxed its capital controls as early as in February 1999 to permit the repatriation of foreign funds subject to a graduated exit tax. The state

39 Suffice it here to recall that Anwar Ibrahim was dismissed from all government posts one day after the capital controls were instituted.

60

continued to do so until essentially only the currency peg and the ban on offshore ringgit trade remained. None of this prevented some investment funds (notably Templeton) from staying away from Malaysia, even after September 1999 when previously trapped foreign funds could exit without penalty. Nonetheless, the state could return to the money market, albeit aided by the quiet backing of the Japanese government and burdened with punitive premiums. In late 1999, the government and Petronas issued bonds of US$1 billion and US$500 million respectively. In the interests of conducting business despite their disagreements in principle, the state and the money market had a rapprochement.40

The remaining years of the Mahathir administration saw nothing radical being

implemented. If anything, selected reversals of privatization exercises were imposed which were not more than rationalizations necessitated by crisis-induced collapses, definitely not tantamount to a new policy of significant re-nationalization. As Mahathir prepared to retire, the market harboured hopes that the administration of his successor, Abdullah Ahmad Badawi, would tread once more the pre-crisis path of liberalization and ‘pro-market governance’. By then, actually, the semi-autarkic regime had practically been dismantled, and only the currency peg and a ban on offshore trade in the ringgit remained. The ringgit’s peg to the US dollar was removed in July 2005, as BNM had maintained it would when it no longer served its purpose of ensuring stability amidst volatility in the foreign exchange trade. VII. Politics, social policies and transformation

Whatever the shortcomings in its management and the adverse impacts from recessions it had suffered, the Malaysian economy was crucially not mired in any truly protracted slumps from which some economies were unable to recover. The reasons for such failures to develop or expand were often as much political as economic but the result was nonetheless to consign large sections of their populations to relentless immiseration. In Malaysia, in contrast, growth has been both cause and effect of the state’s commitment to economic development. Political imperatives of growth

There were compelling political motivations behind an unmistakable statist preoccupation with growth. The nationalism behind independence could only be vindicated by a credible demonstration that decolonization actually meant that the nation could develop, prosper and advance more rapidly and impressively than under colonial rule. In one expression of this condition, the post-independent economic development formed a central part of a strategy of counter-insurgency that held capitalism to be a superior alternative to communist militancy. In another telling expression of the same condition, it was partly the Alliance’s inability to meet some the mass economic expectations and disaffections of the 1950s and 1960s that lay behind the electoral losses the Alliance suffered two days before ethnic violence broke out on ‘May 13’. Hence, growth was necessarily a plank of political stability where successful development was a principal source of legitimation.

40 A concrete indication of the rapprochement was Morgan Stanley Capital International’s re-incorporation of Malaysia in its index in 2000 that allowed fund managers to re-enter the KLSE. An ideological sign of the state-market compromise was supplied by the Asian Wall Street Journal editorial of 23 June 1999 which cajoled Mahathir: ‘Now that the pressure of the Asian crisis has abated, it’s time to declare victory and rejoin the global economy.’

61

Beginning with NEP, therefore, all post-1969 regimes staked their viability on

growth and development and, over time, infused their planning and implementation agencies with a ‘pro-growth faith’. Perhaps that faith was exemplified by Mahathir’s Vision 2020 computation that only an average annual growth rate of seven per cent was required from 1991 to 2020 to propel Malaysia into the ranks of the developed countries. Such faith in growth could have unexpected manifestations. It could, for instance, reach a height of hubris before the 1997 financial crisis when Mahathir boasted that, since there was nothing ‘fortuitous’ about his approach to economic management, his regime could attain rapid growth with ‘zero inflation’ and without overheating. Conversely, an intuitive appreciation of the indispensability of growth could inject economic policies with doses of realism. For example, since it had always eschewed the nationalization of foreign assets, the state had to rely on high growth to create a non-self-destructive basis for redistribution, or, as the NEP would have it, restructuring without provoking resentment. For that matter, in 1986, when he faced a split in his own party and policy polarization in his administration, Mahathir defended his politically risky suspension of NEP restructuring thus: ‘NEP is based on growth…. Obviously if there is no growth, there will be nothing to distribute’ (Khoo 1995: 140).

One might somewhat cynically argue, too, that only continued high growth

could tolerate the wasteful and inequitable rent-seeking and cronyist corporate conduct that throve under Malaysia Inc. and privatization. Put differently, high growth accommodated oligarchic aggrandizement and accumulation – so long as it was not mere plunder that was disembodied from socio-economic development – while creating trickle-down effects for the poor, expanding market-based business, employment and educational opportunities for the NEP-excluded non-Malays, and supporting reasonably high levels of public investment in social services. The significance of social policies

The last point here, illustrated by the data in Table 20, is significant for understanding how the state’s growth strategies were partially driven by social policies largely subsumed under the NEP. Within the ethnic political system, the single most important constituency of the most powerful party, UMNO, has always been the Malay community. Although the NEP was officially meant mostly to benefit the ethnically more inclusive bumiputera, it was predominantly to the Malay community – regarded as a relatively poor and ‘relatively backward’ bloc in pre-NEP times (Khoo 2005: 10–11) – that the UMNO-dominated Barisan Nasional federal government and most state governments directed many types of poverty eradication and restructuring programmes. The implementation of NEP drove the expansion of all levels of public education, the improvements in state health services, the extension of physical infrastructure and basic amenities to rural areas, the accelerated development of land resettlement schemes, the creation of townships, the promotion of homeownership, the construction of state low-cost urban housing, and the provision of subsidized commercial properties.41

41 By 1995, among poor urban households, 88 per cent had access to electricity, 92 per cent safe drinking water and 88 per cent lived within nine kilometers of either a government or private clinic; the corresponding figures among poor rural households were 72 per cent, 65 per cent and 77 per cent respectively (Ragayah 2004: 21).

62

Table 20 Expenditure on Social Sectors as a Proportion of

Total Government Development Expenditure by Malaysia Plan (MP)

Proportion of total government development expenditure (%) 2nd MP 3rd MP 4th MP 5th MP 6th MP 7th MP 8th MP

Education & training 9.38 7.31 10.12 16.1 13.4 19.9 19.9Health & population 2.47 1.45 1.59 2.6 4.4 3.8 3.8Information, broadcasting 1.15 0.33 0.18 0.1 0.2 0.2 0.2Housing 2.24 6.04 8.49 4.1 3.3 3.4 3.4Other areas 2.11 1.98 1.14 1.9 3.5 4.4 4.4Total for social sectors 17.35 17.15 21.53 24.8 24.8 31.6 31.6Source: Summarized from Table 11, supra.

Of course, not all social policies benefitted the Malays uniformly or targetted them only. In overwhelmingly Malay-majority areas in Kelantan, Terengganu and Kedah, for instance, Malay households that were identifiably supportive of the opposition Islamic Party were liable to be bureaucratically denied government subsidies and other forms of assistance. In Sabah and Sarawak, where the vast majority of the non-Malay bumiputera lived, the non-UMNO-led BN governments enjoyed the advantage of deriving comparatively high state revenues from timber and, additionally, petroleum and gas in Sarawak. The various Sabah and Sarawak governments could, therefore, fund some NEP-style social policies although, it should be noted in passing, such policies only mitigated the tendency of the same governments, being freer of UMNO’s domination in their respective states, to benefit their local politically favoured interests more freely.

A politically atypical situation was found in the state of Penang, the centre of the

FDI-led electronics-based EOI. There, between 1970 and 1990, the Gerakan-headed government pursued a mix of economic and social policies that combined rural industrialization (that is, the creation of export-processing zones [EPZs] in semi-rural settings), rural urbanization (based on the development of two new townships), urban redevelopment (to revitalize the oldest city in the country), and the promotion of tourism.42 Penang’s state-led programme reversed the decline of its regional economy that had been dependent on entrepôt trade up to the 1960s. The EOI-centred employment generation advanced NEP restructuring, mostly by drawing large numbers of young rural Malay women into the MNCs’ labour-intensive activities. But for Penang, until recently Malaysia’s uniquely ‘Chinese-majority state’, the Gerakan’s strategy simultaneously addressed the economic expectations of its non-Malay constituencies that had staunchly backed the Gerakan’s triumph over the Alliance in the 1969 general election.43 As with the NEP state, the Penang government then was interventionist. And, here, the lower purchasing power of the non-executive, non-professional, EPZ level wages, for example, were somewhat compensated by expanded popular access to state low-cost housing, the maintenance (by administrative procedures if not by law) of urban rent control in older inner-city housing, and the retention of a vibrant informal sector of petty-trading and hawking that helped to keep down the prices of food and other consumer services.

42 Another policy of promoting agro-horticultural activities did not succeed. 43 But by 1974, Gerakan had joined BN, the Alliance’s enlarged successor.

63

Finally, the adoption of social policies for poverty reduction and the use of social policies as drivers of growth would not have been likely had it not been for the financial and institutional commitments undertaken by the state. In addition to its development expenditures, the state’s adequate operating budgets and its developed administrative machinery made it feasible to deliver important social services such as public education, health and housing. If anything, inefficiencies emerged because of an excess, rather than a dearth, of agencies and capacity devoted to providing certain kinds of social services. The quality of transformation

For all the weaknesses that were attributed to the FDI-led EOI, its protagonists – the state, the MNCs, and the labour of the EPZs – played their roles to near perfection. Through various crises, the state premised its basic policy framework on an ‘open and liberal trading regime, sound macroeconomic management and long-term vision to accelerate the industrialization process’ (BNM 2000: 55) in order to remain conducive to foreign investment. In turn, the MNCs sustained FDI inflows despite early warnings, from the launch of EOI, about the MNCs’ being footloose. These two factors combined with the tightly controlled industrial work force to catalyze the rapid rise of the manufacturing sector within the economy. As a result, the state would continue to value the foreign-dominated EOI for its capital inflows and for stabilizing the employment situation (despite occasional retrenchments). It became a constant priority, in official rhetoric and policy, to ensure political stability to attract and retain FDI. It was standard practice to immunize the MNCs against the pressures of organized labour and the depredations of bureaucracy. Unlike the ‘old’ foreign non-manufacturing corporations, the MNCs in EOI were never subjected to ‘backdoor nationalization’, that is, state-initiated corporate takeovers and restructuring. If anything, the state would turn again to an influx of FDI into EOI to retrieve the economy from the politically destabilizing recession of 1985–86.

However, the state’s decision to offer the role of manufacturing vanguard to the EOI-oriented MNCs, at the critical juncture of NEP’s launch, embarked industrial policies and practices upon a certain path dependence that eventually affected the quality of the manufacturing sector. Indeed, the more dependent on EOI the economy was and the more critical the MNCs’ role became, the more difficult it was for industrial polices to spawn domestic firms that would be willing and able to compete with the MNCs. It was not that the policy-makers were unaware of some of EOI’s inbuilt limitations. By the end of the first decade of EOI, the Penang government had already planned to moderate an initial dependence on labour-intensive industrialization by attracting capital- and technology-intensive industrialization. But, just as ISI was perhaps delayed because of complacent commodity production, so the development of indigenous – ‘late follower’ – high-technology capabilities that could compete with the MNCs was partially stunted by EOI success itself.44 Hence, for example, despite the strategic start that the electronics manufacturing sector enjoyed, this sector has not experienced anything comparable to the success of industrial deepening or the rise of outstanding domestic corporations that characterized South Korea’s chaebol-led industrialisation. With the MNCs entrenched in EOI – and not subject to NEP equity restructuring – the manufacturing sector was not, and arguably could not, be weaned from FDI domination by the time the state was compelled to make renewed and

44 See the discussion of this point of Wheelwright’s in the earlier section on ISI.

64

desperate overtures to FDI during the recession of the mid-1980s. Consequently, ‘almost all internationally competitive non-resource based industrial capability [was] foreign-owned’ (Jomo 2001a: 4). As it were, the domestic conglomerates (with a few exceptions in resource-based manufacturing) and EOI bypassed one another, leaving Malaysia’s state-owned or private conglomerates to be leaders in commerce rather than captains of industry.45

The reliance on EOI had another kind of impact on corporate-industrial structure, that is, EOI did not stimulate outstanding growth among the SMEs. On the whole, the SMEs did not have extensive linkages to the MNCs partly because of the high tariff-free import content of EOI. But, indirectly, the success of EOI permitted the state to persist with the counter-productive ethnic dimensions of industrial policies. As Rasiah (2001a) had shown, some assistance from the ‘non-Malay’ Gerakan government in Penang could go a long way towards developing ‘Chinese’ SMEs in the machine tools sector. But, for a long time, state assistance was not forthcoming. Where the Malay leadership’s reluctance to promote ‘Chinese industrial domination’ might once have delayed industrialization, now a similar reluctance might have held back the ‘Chinese-dominated SME sector’.46 In general, non-Malay-owned SMEs did not receive the degree of state sponsorship given to Malay-owned SMEs, notably under Proton’s vendor development programme.47 Had HICOM’s projects truly taken off, Proton and Perwaja could have formed the energizing vanguard of a second wave ISI that had considerable SME contributions. But Perwaja had failed dismally while Proton was confined to the domestic market and reliant on foreign technology. Consequently, although particular SMEs became the valued subcontractors of certain MNCs, the SME sector in Malaysia could never emulate Taiwan’s SME-based innovations and achievements in electronics.

One other outcome of EOI’s entrenchment was an ambivalent effort to advance

from low value-added production towards skill- and productivity-upgrading that was consistent with more advanced phases of EOI. The beginning of EOI contained a ‘tradeoff’ – severe restrictions on labour’s right to unionize and bargain at the workplace in return for FDI expansion and mass employment. Under the labour surplus conditions of the 1970s and 1980s, EOI was valued for its generation of low-skilled and low-waged manufacturing employment. But the ‘tradeoff’ persisted into the tight labour market of the pre-crisis 1990s when the state permitted the entry of foreign labour into what used to be ‘for domestic labour only’ manufacturing sites. This resort to a plentiful supply of cheap, low-skilled, and foreign (and, hence, more vulnerable) labour ‘eased the pressure on firms to develop skills and introduce more productive techniques and slowed the restructuring towards higher-wage, higher-productivity industries’ (Todd and Peetz 2001: 1381). To that degree, despite encouraging training and skill-upgrading with selective fiscal and institutional support, the Malaysian state’s acquiescence to the MNCs’ demands for unorganized low-waged labour lacked the determination of, say, Singapore’s approach to a tight labour market after an initial phase of EOI. Although it controlled its labour no less tightly, Singapore deployed a ‘corrective wage policy’ to promote higher value-added production on the assumption that ‘artificially low wages

45 For example, among the biggest domestic public listed companies are Malayan Banking (finance), Telekom (telecommunications), Tenaga (utilities), Genting (gaming and resorts), Sime Darby (trading). 46 Again, see Wheelwright’s point as discussed in the section on ISI. 47 For a brief comment on the Proton-sponsored vendor development programme’s emphasis on the (NEP) ‘redistribution goals of the Malaysian government, see Suyerhoud (1999: 12).

65

had acted as a disincentive to raising productivity’ and ‘did not adequately reflect the genuine scarcity of labour’ (Rodan 1989: 146).48

VIII. Conclusion

From the perspective of wider postcolonial experiences, Malaysia’s half-century of development might be portrayed as a process of overcoming historical weaknesses that included a dependence on primary commodities, declining terms of trade, non-autonomous export-reliant growth and foreign domination of key economic sectors. The process refashioned inherited structures of colonial capitalism to reach what might be called a position of intermediate success. In bad times, the economy did not sink to the wretched level of some truly disastrous postcolonial experiences. In the best of times, the economy did not scale the heights of successful Northeast Asian late industrialization. By way of conclusion, some reasons may be offered to explain this intermediate outcome.

First, since the postcolonial economy was capitalist while the state had aligned itself with the capitalist part of the world throughout the Cold War, Malaysia’s position belonged with the patterns of uneven development wrought by global capitalism. As the review of crisis-struck Southeast Asia by Anderson (1998: 299–318) so insightfully argued, certain geopolitical and regional factors that shaped the political economy of Asia after World War II also paved the way for the emergence of the East Asian NIEs, at any rate up to the end of the Cold War. To that extent, Malaysia, located where it was and acting when it did, benefitted from the region’s specific advantages, namely, the economic by-product of USA’s dominating Cold War presence, a lack of competition due to China’s post-revolutionary ‘absence’, an integration with Japan’s post-war recovery, and the domestic role of the ‘Overseas Chinese’ of Southeast Asia.

Second, an early appreciation of the advisability, but also the limitations, of commodity diversification was flexibly translated into other policies that sustained broader economic diversification. Initially the strategy was to diversify the range of products within the commodity sector but later strategy went beyond cultivating a variety of cash crops to find effective practice in different contexts. Confronting the collapse of most commodity prices in the mid-1980s, for example, Mahathir fumed that ‘we were lulled into a sense of security by the success of the diversification strategy’ which had assumed ‘that the fluctuations in the prices of different commodities [would] balance each other’ (Khoo 1995: 115). Soon diversification meant reducing the dependence on primary commodities by producing manufactured goods and subsequently transiting from ISI to EOI. Even the drive towards HI – despite being imitative in conception, uninspired in implementation, and costly in its failures – was an effort to diversify the manufacturing sector in a ‘can-do’ endeavour to liberate the economy from dependent manufacturing, so to speak.49 And while HI was struggling, the state was already planning new initiatives to encourage resource-based, agro-based and high-technology-oriented industries. During the mid-1980s, diversification also took the form of promoting tourism’s ‘vital role in redressing the adverse balance of 48 It is too optimistic, given its repressive-fearful attitudes towards migrant labour, to suggest, as Kuruvila (1998) did, that Malaysia, like Singapore, would integrate higher-skilled EOI with more expansive immigration policies. 49 Characteristically Mahathir defended his push to HI by urging that ‘we should overcome the mental block which condemns us to being the producers of primary commodities to fuel the growth of the industrialized countries’ (Khoo 1995: 120).

66

payments position of the country’ (Malaysia 1986: 395) and the tourist sector’s potential for boosting construction and creating new areas of employment. Aided by a wide resource base and facilitated by comparatively farsighted planning, diversification equipped different sectors of the economy with complementary, or at least mutually compensating, forms of international competitiveness, thereby introducing various degrees of resilience to withstand cyclical or sudden changes in the world economy.

Third, the state built up a strong capacity for management, strategic planning,

policy implementation, and regulation that permitted the state to respond pragmatically to setbacks and crises. In the early postcolonial years, when a limited range of commodity exports determined the extent of state revenues, the Alliance’s fiscal conservatism –whatever else its flaw was – preempted any descent into unsustainable indebtedness that wrecked other postcolonial experiences in economic management. Even during the mid-1980s’ recession, when state revenues fell because of the collapse of commodity prices, the Mahathir administration – for all its predilection towards heavy spending – strove to reduce public external debt somewhat ahead of its repayment schedule. The uninterrupted tenure of the Alliance/BN – besides making the political system stable, if increasingly authoritarian – gave the state both experience and flexibility in shaping its responses to the market at different times. Hence, the state lived very much by the market up to the 1960s, governed it during the 1970s, liberalised and deregulated it in the 1980s, and yet could resist market and neoliberal pressures in 1997–98. Again, while pursuing its nationalist-capitalist project, the state was decisively interventionist at one point even if it did not evolve into a clone of the East Asian developmental state at its most efficient. On the contrary, the state in recent years acquired skewed corporatist features that excluded any meaningful labour representation. For all the flaws and abuses that accompanied bureaucratic expansion, privatization, Malaysia Inc., and the opportunistic restructuring which it nurtured or tolerated, the state remained beholden to basic social policies that began with the NEP’s objective of ‘poverty eradication irrespective of race’. The state did not set out to create a social democratic or developed welfare system. Yet it acquired a ‘welfarist’ (Chan 2007) mould because of residual nationalist claims, the sheer necessity of finding a solution to an otherwise divisive ethnic division of labour, and a reformist response to the crisis of 1969. Thus, even though an emerging elite’s interest in NEP-sanctioned restructuring was self-serving, it had to be balanced against mass expectations of socio-economic improvement. With that, inequitable pro-market policies, notably privatization, were to partially balanced by redistributive social policies, thus moderating the scale of oligarchic aggrandizement that elsewhere translated into the completely unproductive plunder in economically ‘failed states’.

Finally, there were fortuitous factors and developments, although it required

institutional capacity to take advantage of those. Notably, there was the existence of petroleum and natural gas. As it turned out, the production of petroleum and natural gas commenced after NEP’s launch and before the first oil shock. Oil came just in time to fuel the state-led growth of the former and to absorb the ravages of the latter. When petroleum price fluctuations brought their own uncertainties, the state managed its position of being a net oil exporter much better than Indonesia or Nigeria, say. Evidence of that comes in the financially sound position of the national petroleum corporation, Petronas, whose revenues have been tapped to service the state’s financial rescue plans on more than one occasion. Likewise, crucial changes to the international organization of production – namely, the emerging ‘new international division of labour’ in the 1970s, and the intensifying international segmentation of production in the 1980s –

67

offered chances that the state seized, albeit by making concessions to FDI that would permit a high degree of concentration of foreign investment in the manufacturing sector.

ABBREVIATIONS

ASB Amanah Saham Bumiputera (Bumiputera Share Trust) ASN Amanah Saham Nasional (National Share Trust) BA Barisan Alternatif (Alternative Front) BCIC Bumiputera Commercial and Industrial Community BN Barisan Nasional (National Front) BNM Bank Negara Malaysia DAP Democratic Action Party EOI export-oriented industrialization EPF Employees’ Provident Fund EPU Economic Planning Unit FDI foreign direct investment Gerakan Parti Gerakan Rakyat Malaysia (Malaysian People’s Movement) GLC government-linked company GLIC government-linked investment company FELDA Federal Land Development Authority HI heavy industrialization HICOM Heavy Industries Corporation of Malaysia IPP Independent power producer ISI import-substituting industrialization MARA Majlis Amanah Rakyat (Council of Trust for the People) MCA Malaysian (originally Malayan) Chinese Association MIC Malaysian (originally Malayan) Indian Congress MNC multinational corporation MSC Multimedia Super Corridor NEP New Economic Policy NPL non-performing loan PAS Parti Islam SeMalaysia (Pan-Malaysian Islamic Party) Proton Perusahaan Otomobil Nasional (National Automobile Industry) SEDC State economic development corporation SOE State-owned enterprise UMNO United Malays National Organization

68

REFERENCES

Entries for non-western names are cited and arranged alphabetically according to surnames or first names, without the use of commas, except where the first name is an honorific, or where the name follows western convention in the original source. Abdul Rahman Embong. 1995. “Malaysian Middle Classes: Some Preliminary Observations.” Jurnal Antropologi dan Sosiologi, No. 22, pp. 31–54. Abdul Razak, Tun. 1971. Speech at the Development Seminar organized by UMNO Youth, Morib, Pahang, 25 July. In Dasar Ekonomi Baru: hikmat, kebajikan dan peranan parti. UMNO, Petaling Jaya. Adam, Christopher and William Cavendish. 1995a. “Background.” In Jomo K. S. (ed.), Privatizing Malaysia: Rents, Rhetoric, Realities. Westview Press, Boulder, Colorado. _____. 1995b. “Early Privatizations.” In Jomo, K. S. (ed.), Privatizing Malaysia: Rents, Rhetoric, Realities. Westview Press, Boulder, Colorado. Anderson, Benedict. 1998. The Spectre of Comparisons: Nationalism, Southeast Asia, and the World. Verso, London and New York. Asian Wall Street Journal. 1998. “Malaysia Needs to End Isolation”. 23 June Bank Negara Malaysia. Various years. Annual Report. (BNM AR). Kuala Lumpur. _____. Various years. Monthly Statistical Bulletin (BNM MSB). Kuala Lumpur. Bowie, Alasdair. 1991. Crossing the Industrial Divide: State, Society and the Politics of Economic Transformation in Malaysia. Columbia University Press, New York. Chan Chee Khoon. 2007. Re-inventing the Welfarist State? Health Systems in Transition. Paper presented at the International Conference on the Role of the State in Public Service Delivery, Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore, 27–28 September. Chee Peng Lim. 1985. “A Review of Rural Non-Farm Activities in Malaysia.” In Swapna Mukhopadhay and Chee Peng Lim (eds.), Development and Diversification of Rural Industries in Asia. Asian and Pacific Development Centre, Kuala Lumpur. Devadason, Evelyn S. 2007. Labour Demand and Trade in Manufactures: Issues and Evidence from Malaysia. University Malaya Press, Kuala Lumpur. Edwards, Chris. 1995. “Tariff and trade-related policies for Malaysian industrialization.” In Vijayakumari Kanapathy (ed.), Managing Industrial Transition in Malaysia. Institute of Strategic and International Studies, Kuala Lumpur. Financial Times. 1995. Banking in the Far East 1995. FT Financial Publishing, London. Fox, Justin (1998) ‘The Great Emerging Markets Rip-Off’, Fortune, May 11 1998 http://www.pathfinder.com/fortune/1998/980511/gre.html; accessed on 22 July 22 1998.

69

Gomez, Edmund Terence. 1990. UMNO’s Corporate Investments. Forum, Kuala Lumpur, _____. 1994. Political Business: Corporate Involvement of Malaysian Political Parties. James Cook University of North Queensland, Centre for South-East Asian Studies, Townsville, Queensland. ______ and Jomo K. S. 1997. Malaysia’s Political Economy: Politics, Patronage and Profits. Cambridge University Press, Cambridge. Heng Pek Koon. 1992. “The Chinese Business Elite of Malaysia.” In Ruth McVey (ed.), Southeast Asian Capitalists. Cornell University Southeast Asia Program, Ithaca. Ismail Muhd. Salleh. 1995. “Non-tariff incentive policies.” In Vijayakumari Kanapathy (ed.), Managing Industrial Transition in Malaysia, Institute of Strategic and International Studies, Kuala Lumpur. Jayasankaran, S. and Murray Hiebert. 1998. “Calling for Daim”. Far Eastern Economic Review, 19 February, p. 14. Jesudason, James V. 1989. Ethnicity and the Economy: The State, Chinese Business, and Multinationals in Malaysia., Oxford University Press, Singapore. Jomo K. S. 1986. A Question of Class: Capital, the State, and Uneven Development in Malaya. Oxford University Press, Singapore. _____. 1990. Growth and Structural Change in the Malaysian Economy. Macmillan, London. _____. 1995. “Overview.” In Jomo K. S. (ed.), Privatizing Malaysia: Rents, Rhetoric, Realities. Westview Press, Boulder, Colorado. _____. 1998. “Malaysia: From Miracle to Debacle.” In Jomo K. S. (ed.), Tigers in Trouble: Financial Governance, Liberalisation and Crises in East Asia. Zed Books, London and New York. _____. 2001a. “From Currency Crisis to Recession.” In Jomo K. S. (ed), Malaysian Eclipse: Economic Crisis and Recovery. Zed Books, London and New York. _____. 2001b. “Capital Flows.” In Jomo K. S. (ed), Malaysian Eclipse: Economic Crisis and Recovery. Zed Books, London and New York. _____, Khoo Boo Teik and Chang Yii Tan. 1996. “Vision, Policy, and Governance in Malaysia.” In Leila Frischtak and Izak Atiyas (eds.), Governance, Leadership, and Communication: Building Constituencies for Economic Reform. World Bank, Washington, D. C. _____ with Liew San Yee and Laura Kaehler. 2001. “Capital Flows Volatility.” In Jomo K. S. (ed), Malaysian Eclipse: Economic Crisis and Recovery, Zed Books, London and New York

70

Khoo Boo Teik. 1995. Paradoxes of Mahathirism: An Intellectual Biography of Mahathir Mohamad. Oxford University Press, Kuala Lumpur. _____. 2003. Beyond Mahathir: Malaysian Politics and its Discontents. Zed Books, London and New York. _____. 2005. Ethnic Structure, Inequality and Governance in the Public Sector: Malaysian Experiences. Programme on Democracy, Governance and Human Rights, Paper No. 20, UNRISD, Geneva. _____. 2007. Reading the Ninth Malaysia Plan 2006–2010 Politically. Paper presented at the Conference on the Malaysian Economy: Developments and Challenges, Institute of Southeast Asian Studies, Singapore, 25–26 January Khoo Khay Jin. 1992. “The Grand Vision: Mahathir and Modernisation.” In Joel S. Kahn and Francis Loh Kok Wah (eds.), Fragmented Vision: Culture And Politics in Contemporary Malaysia. Allen and Unwin, St. Leonard, New South Wales. Kuruvilla, S. 1995. “Industrialization strategy and industrial relations policy in Malaysia.” (Electronic version). In S. Frenkel and J. Harrod (eds.), Industrial and labor relations: Contemporary research in seven countries. ILR Press, Ithaca, New York. (http://digitalcommons.ilr.cornell.edu/articles/39; sighted on 12 November 2007) _____. 1998. “Linkages Between Industrialization Strategies and Industrial Relations/Human Resource Policies: Singapore, Malaysia, the Philippines and India.” Industrial and Labour Relations Review, Vol. 49, pp. 635–657. Lim Teck Ghee. 1984. “British Colonial Administration and the ‘Ethnic Division of Labour’ in Malaya”. Kajian Malaysia, Vol. 2, No. 2, December, pp. 28–66. Low, Linda. 2000. “The Politics of Asian Corporate and Financial Restructuring.” In Abdul Rahman Embong and Jürgen Rudolph (eds.), Southeast Asia into the Twenty First Century: Crisis and Beyond. Universiti Kebangsaan Malaysia, Bangi, Malaysia. Lucas, Robert E. B. and Donald Verry. 1999. Restructuring the Malaysian Economy: Development and Human Resources. Macmillan Press, London. Machado, Kit. 1989–90. “Japanese Transnational Corporations in Malaysia’s State Sponsored Heavy Industrialization Drive: The HICOM Automobile and Steel Projects.” Pacific Affairs, Vol. 62, pp. 504–31. _____. 1994. “Proton and Malaysia’s Motor Vehicle Industry: National Industrial Policies and Japanese Regional Production Strategies.” In Jomo K. S. (ed.), Japan and Malaysian Development: In the Shadow of the Rising Sun. Routledge, London. Mahani Zainal Abidin. 2000. “Malaysia’s Alternative Approach to Crisis Management”. In Southeast Asian Affairs 2000. Institute of Southeast Asian Studies, Singapore. Mahathir Mohamad. 1991. “Malaysia: The Way Forward.” New Straits Times, 2 March Malaysia. 1965. First Malaysia Plan 1966–1970. Kuala Lumpur.

71

_____. 1971. Second Malaysia Plan 1971–1975. Kuala Lumpur. _____. 1973. Mid-Term Review of the Second Malaysia Plan 1971–1975. Kuala Lumpur. _____. 1976. Third Malaysia Plan 1976–1980. Kuala Lumpur. _____. 1981. Fourth Malaysia Plan 1981–1985. Kuala Lumpur. _____. 1986. Fifth Malaysia Plan 1986–1990. Kuala Lumpur. _____. 1991. Sixth Malaysia Plan 1991–1995. Kuala Lumpur. _____. 1996. Seventh Malaysia Plan 1996–2000. Kuala Lumpur. _____. 1998. National Economic Recovery Plan: Agenda For Action. Kuala Lumpur. _____. 1999. Kajian Separuh Penggal Rancangan Malaysia Ketujuh 1996–2000 (Mid-term Review of the Seventh Malaysia Plan 1996–2000). Kuala Lumpur. _____. 2001. Eighth Malaysia Plan 2001–2005. Kuala Lumpur. _____. 2006. Ninth Malaysia Plan 2006–2010. Kuala Lumpur. Mehmet, Ozay. 1986. Development in Malaysia: Poverty, Wealth and Trusteeship. Croom Helm, London. Mohamed Arief. 1996. “Effects of Financial Liberalization on Four Southeast Asian Financial Markets, 1973-94.” ASEAN Economic Bulletin, Vol. 12, No. 3, March, pp. 325–38. Parti Gerakan Rakyat Malaysia. 1984. The National Economic Policy – 1990 and Beyond. Kuala Lumpur Puthucheary, James. 1960. Ownership and Control in the Malayan Economy. Eastern Universities Press, Singapore. Rasiah, Rajah. 1995. Foreign Capital and Industrialization in Malaysia. St. Martin’s Press, New York. _____. 2001a. Government-Business Coordination and Small Business Performance in the Machine Tools Sector in Malaysia. World Bank Institute, Washington, D. C. _____. 2001b. “Pre-crisis Economic Weaknesses and Vulnerabilities.” In Jomo K. S. (ed.), Malaysian Eclipse: Economic Crisis and Recovery. Zed Books, London and New York. Rodan, Garry. 1989. The Political Economy of Singapore’s Industrialization: National State and International Capital. Kuala Lumpur, Forum Enterprise.

72

Ragayah Hj Mat Zin. 2004. Inequality, Poverty and Social Safety Net: The Case of Malaysia. Paper presented at the 4th International Malaysian Studies Conference. Bangi, Malaysian Social Science Association, 3–5 August. Rugayah Mohamed. 1995. “Public Enterprises.” In Jomo K. S. (ed.), Privatizing Malaysia: Rents, Rhetoric, Realities. Westview Press, Boulder, Colorado. Searle, Peter. 1999. The Riddle of Malaysian Capitalism: Rent-seekers or real capitalists? Allen and Unwin, St. Leonards, New South Wales. Sieh Lee Mei Ling, 1992. “The Transformation of Malaysian Business Groups.” In Ruth McVey (ed.), Southeast Asian Capitalists. Cornell University Southeast Asia Program, Ithaca. Suyderhoud, Jack P. 1999. The Malaysian Economic Development Challenge: Can Productivity Growth Co-exist With Income Redistribution? Paper presented at the 7th Tun Abdul Razak International Conference, Penang, 2–4 December. Tan Eu Chye and Mohamed Ariff. 2001. “ Structural Change in the Malaysian Manufacturing Industry.” In Colin Barlow (ed.), Modern Malaysia in the Global Economy: Political and Social Change into the 21st Century. Edward Elgar, Cheltenham. Tan Tat Wai. 2003. “The Impact of the 1997 Financial Crisis on Malaysia’s Corporate Sector and its Response.” In Colin Barlow and Francis Loh Kok Wah (eds.), Malaysian Economics and Politics in the New Century. Edward Elgar, Cheltenham. Time. 1998. “How dare you say such things?”, June 15. http://www.pathfinder.co...malaysia_interview.html; sighted circa July 1998). Todd, Patricia and David Peetz. 2001. “Malaysian industrial relations at century’s turn: Vision 2020 or a spectre of the past?” The International Journal of Human Resource Management, Vol. 12, Issue 8, December, pp. 1365–1382 Todd, Patricia and Jomo K. S. 1994. Trade Unions and the State in Peninsular Malaysia. Oxford University Press, Kuala Lumpur. United Nations Development Program. 2007. Human Development Report 2007/2008. New York. Wheelwright, E. L. 1965. Industrialization in Malaysia. Melbourne University Press, Melbourne. Zainal Aznam Yusof, Awang Adek Husin, Ismail Alowi, Lim Chee Sing, and Sukhdave Singh. 1996. “Financial Reform in Malaysia.” In Gerard Caprio, Izak Atiyas, and James A. Hanson (eds.), Financial Reform: Theory and Experience. Cambridge University Press, Cambridge.

73

CHAPTER 3

Poverty and Inequality

Khoo Khay Jin

At the point of independence in 1957, Malaya (subsequently Malaysia in 1963), was an ethnically divided nation, marked by substantial inter-ethnic differences/disparities in educational attainment, occupation and residential location (rural/urban; state), and hence, consequent upon those differences, also by substantial differences in income and wealth in the modern sector. Political organisation and mobilisation leading up to independence, despite compromises by all (ethnically based) parties, not only derived from those differences, but reinforced the perception that ethnicity was and is the principal axis of division, and the main explanatory and causal factor.

The compromises represented by the independence constitution in what was (and is) – before the terms became fashionable, if with variant meanings – a massively multicultural society with an inherited notion of indigeneity. The incapacity of the government to manage those compromises and meet the expectations of independence directly led to the crisis of independence, symbolised by the major post-election ethnic violence on May 13 1969 and the days following.

The failure to meet the expectations of social and economic advancement and equity, on the one hand, and of political equality of multicultural citizenship, on the other, conjointly contributed to the crisis. The solution, the New Economic Policy (NEP), was an assertion of the primacy of the demands of indigeneity, in the broad sense, and its claim on the nation, given the attribution of primary cause of the crisis to horizontal or ethnic inequality. The launch of the NEP to address the horizontal inequality was softened somewhat with a plank on poverty reduction without regard to ethnicity. Both objectives of the NEP were to be carried out within an essentially market economy under the rubric of growth with redistribution. The upshot was a significantly interventionist redistributive state; the long-term outcome, as might have been predicted, was elite capture of policy, with concomitant implications for vertical inequality, if restrained somewhat by the demands of electoral politics.

The NEP was officially launched in 1971 and ended in 1990. However, its successor variants – the National Development Policy (NDP) (1990-2000) and the National Vision Policy (NVP) (2000-2010), and, with the prime ministerial transition in November 2003, the re-framing of the National Vision Policy as the New National Agenda (NNA) – continue to cleave to the core planks of the NEP.

Chapter 1 has already provided an overview of the NEP which contextualises the thrust of this chapter.50 The remainder of this chapter briefly sets out the record in

50 Jomo (2004) provides a detailed summary, Shireen (1998: Ch 1) a more extensive discussion. Maznah (2005) argues that the NEP effectively ended in the mid-1980s and that the NDP signalled a further departure. It is true that the Sixth Malaysia Plan, 1991–95, announcing the NDP, did not have a chapter on distribution and re-structuring; but the objectives were stated up front in the first chapter in the same terms as previously. The Mid-Term Review of the Sixth Malaysia Plan again had a chapter on distribution and re-structuring with the same headings as previously.

74

poverty reduction, discusses wealth restructuring issues, and evaluates the record in educational equity, occupational re-structuring and income distribution.

I. Eradication of poverty

There is little need to rehearse the standard account of Malaysia’s performance in poverty reduction and its link to the NEP. As summarised in Table 1, official statistics show a decline in the poverty rate from 49 per cent of households in Peninsular Malaysia (PM) in 1970 and 58 per cent of households in Sabah and 57 per cent of households in Sarawak in 1976 to 3 per cent, 17 per cent and 4 per cent of households in Peninsular Malaysia, Sabah and Sarawak, respectively, in 2004.51

Table 1 Incidence of Poverty (% of households) 1970-2002

1970 1976 1980 1984 1987 1990 1995 1999 2002

PM 49.3 39.6 29.0 18.4 17.3 15.0 5.4 6.5 4.3

Sabah n.a. 58.3 41.1 33.1 35.3 34.3 28.5 20.1 16.0

Sarawak n.a. 56.5 47.7 31.9 24.7 21.0 17.0 6.7 5.8

Malaysia

Rural

Urban

52.4

42.4

50.9

18.7

37.4

20.7

27.3

8.5

19.3

17.1

21.8

7.5

8.8

13.0

2.2

7.5

12.4

3.4

5.1

11.4

2.0 Note: the reported rates for 2004 are based on the old poverty line updated to 2004. Sources: various Malaysia Plan documents; Second Outline Perspective Plan and Third Outline Perspective Plan; Ragayah (2008)

While there have been various arguments about the adequacy and reliability of the statistics,52 what is not in doubt is the large and significant reduction in the incidence of poverty, as defined by the poverty line income; the rise in real incomes; and the rise in material standard of life. This last can be measured by other means, for example, the incidence of car ownership and of other consumer semi-durables, etc.

Even so, it is possible to question whether the national poverty line income was set too low, especially for urban areas.53 As such, it can be argued that the measured

51 An exhaustive summary of the available data to 2004 can be found in Ragayah (2008a) 52 As Shireen (1998:48–49) noted, Jomo (1990), in examining the statistics for 1970–1990, pointed out the large and surprising drop in poverty incidence between 1983 and 1984, and the inconsistencies in the data for rubber smallholders between 1984 and 1987, suggesting either that the changes were a statistical artefact or an outcome of a change in the definition of the poverty line. However, there is no evidence of the latter, as the poverty line definition appears to have remained unchanged, other than adjustments for inflation, between 1976 and 2002. In 2004, a new poverty line was adopted (Malaysia, 2006: Chapter 16). See also Nair (2003). 53 The same charge can be levelled at the recently revised PLI which results in a mean urban PLI of RM687 (in 2004 prices) for a notional household of 4.7 persons (Malaysia 2006: 328, Table B). The revised PLI is actually a household PLI, taking into account location as well as household size and composition, converting it into adult equivalents. It comprises a food PLI derived from a basket of items designed by nutritionists, factoring in cultural differences, and a non-food PLI derived from the actual expenditure of the bottom 20% of households in the household expenditure survey. Under this revised

75

reduction in the incidence of poverty is not so much a measure of actual poverty reduction so much as a measure of the proportion of people falling below a certain income level.54 However, all poverty lines, based on some minimum expenditure considered necessary to meet the most basic food and non-food needs, are in a sense arbitrary; what is important is whether they are consistently used and hence a reliable yardstick to measure change across time. Malaysia’s national poverty line, for all the issues that can be raised about it, is generally consistent, although it had the weakness of being set as a household income line. This has now been corrected in the revision of 2004.

The poverty reduction performance can be validated by referring to another measure of the incidence of poverty, namely, the World Bank’s dollar-a-day line.55 Based on the data sets for the household income survey from 1984 to 1997 held by the World Bank, and depending upon their calculations, the poverty incidence dropped from 2 per cent in 1984 to about 0.1 per cent in 1997 (Table 2). There was also a dramatic decline in the severity of poverty as measured by the poverty gap (PG) and the squared poverty gap (SPG). However, inequality over the period was essentially unchanged, allowing for the drop in the Gini in the late 1980s as a consequence of the severe recession of the mid-1980s.

PLI, hardcore poverty means those falling below the food PLI. The “headline” PLI is the mean of the individual household PLI’s (Malaysia 2006: 327-329, Box 16-2). 54 For a “popular”, if partially questionable, critique of the poverty line income, see http://klconfidential.blogspot.com/2008/02/did-they-manipulate-poverty-statistics.html. 55 The construction of this is explained in Ravallion et al. (1991). It made its appearance in the World Development Report 1990 (World Bank 1990). This has been much criticised with regards to its accuracy in the determination of the number of poor, by Reddy and Pogge (2003), for example.

76

Table 2 Poverty (US$1/day income) and Inequality 1984-1997 (1993 PPP$56)

Year PL Mean $

H (%)

PG (%)

SPG (%)

Watts Gini (%)

MLD Pop (million)

1984 32.74 236.90 1.96 0.40 0.14 0.0052 48.63 0.4176 15.30 1987 32.74 228.54 1.20 0.17 0.04 0.0020 47.04 0.3872 16.50 1989 32.74 223.51 0.93 0.14 0.04 0.0017 46.17 0.3707 17.67 1992 32.74 248.07 0.43 0.03 0.00 0.0003 47.65 0.3990 19.13 1995 32.74 258.10 0.90 0.10 0.02 0.0011 48.52 0.4160 20.61 1997 32.74 321.69 0.14 0.01 0.00 0.0001 49.15 0.4271 21.67 Source: World Bank, PovcalNet at http://iresearch.worldbank.org/PovcalNet/jsp/index.jsp accessed 12 October 2007. Since then, PPP’s have been adjusted, resulting in different figures but the same pattern.

This measures only income poverty, as determined by some income line. There are other dimensions to poverty.57 However, some other measures in common use such as the infant mortality rate, coverage of the WHO’s Expanded Programme on Immunisation (EPI),58 the enrolment rate in primary education, or the provision of clean water all point in the same direction.

The impressive national record in poverty reduction belies the regional and spatial/strata unevenness in its achievement. As seen in Table 1, there is significant variation in the poverty reduction achievement by the standard regional classification of Malaysia into Peninsular Malaysia (comprising 11 states), and the states of Sabah and Sarawak. Peninsular Malaysia and Sarawak show a dramatic drop in their incidence rates, but Sabah lags by a considerable margin.

Peninsular Malaysia, at 132,000 sq km, and Sarawak, at 123,000 sq km, are of roughly equivalent size in terms of territory, while Sabah, at about 74,000 sq km, is over

56 The various column headings stand for the following: Poverty Line (PL) is the default poverty line of $32.74 per month. This is the World Bank dollar-a-day poverty line. Mean $ is the average monthly per capita income from survey in 1993 PPP. Headcount (H) is the percentage of population living in households with income per person below the poverty line. Poverty Gap (PG) is the mean distance below the poverty line as a proportion of the poverty line. Squared poverty gap (SPG) is the mean of the squared distances below the poverty line as a proportion of the poverty line. Watts' poverty index (Watts) is the mean across the population of the proportionate poverty gaps, as measured by the log of the ratio of the poverty line to income, where the mean is formed over the whole population, counting the non-poor as having zero poverty gap. Gini index (Gini) is a measure of inequality between 0 (everyone has the same income) and 100 (richest person has all the income). Where comparisons are available, the Gini reported here is higher than that reported in the Malaysia Plan documents. It is well-known that the Gini is sensitive to the number of categories used in its calculation. Further, it is also more sensitive to changes in the middle of the distribution. It is likely that if standard errors are taken into account, there would be no statistically significant differences. MLD index (MLD) stands for the mean log deviation. This is an index of inequality, given by the mean across the population of the log of the overall mean divided by individual income. 57 This was clearly recognised, e.g., in the Mid-Term Review of the Fifth Malaysian Plan, 1986-90; see, pp. 45-7, 58-60. 58 The standard package covers BCG (tuberculosis), DTP (diphtheria, tetanus, pertussis), polio (OPV), and measles. Malaysia includes the hepatitis-B vaccine (SE Asia), Hib (haemophilus influenzae B) and Japanese Encephalitis (Sarawak only).

77

half the size of the other two. But they are of greatly unequal population sizes.59 They also differ substantially in terms of ethnic composition. Peninsular Malaysia comprises three major ethnic groups – Malay, Chinese and Indian making up 61 per cent, 27 per cent and 9 per cent respectively – with a small number, about 133,000, of indigenous peoples of the peninsula by the currently accepted international definition, and another 75,000 of indigenous peoples of Sabah and Sarawak. Sabah and Sarawak, however, have a large proportion of indigenous peoples by the same international definition. Indigenous peoples make up 66 per cent and 50 per cent of the population of Sabah and Sarawak, respectively.60 In addition, 24 per cent of Sabah’s population comprises non-citizens, by self-identification,61 with the likelihood that the real proportion is higher.

The regional disparity in poverty reduction is, in part, a function of the level and pace of urbanisation and industrialisation,62 but, in part, a function of ethnic composition, federal and local governance, and the evolution of the economic structure. Thus, Peninsular Malaysia has a significantly higher urbanisation rate of 66 per cent, compared to 48 per cent for Sabah and Sarawak in 2000. Secondly, as elsewhere in the world, indigenous peoples tend to have higher poverty rates.63 Finally, Sabah and, to a lesser degree, Sarawak64 bear the hallmarks of economies distorted by the poor management of natural resource – in this instance, timber – wealth. For instance, Sabah’s per capita GDP in 1986 was 1.06 times the national per capita GDP, but only 0.63 in 2000.65 In 1987, forestry and logging accounted for 23 per cent of Sabah’s GDP in constant prices; in 2000, it accounted for only 4 per cent. Conversely, the share of agriculture, in constant prices, grew from 12 per cent in 1987 to 20 per cent in 2000.66

There are also spatial disparities within the major regional unit of Peninsular Malaysia. The better developed, more urbanised and industrialised states of the west coast have a much lower poverty incidence than the less developed, much more rural and agricultural states of the east coast and the north.67

59 In the 2000 Census, Peninsular Malaysia had a population of just over 18.5 million, Sabah 2.6 million and Sarawak just under 2.1 million, inclusive of non-citizens. All figures in this paragraph refer to the 2000 Census. 60 The ethnic composition refers only to citizens. 61 The census does not check any documentation. 62 Based on the national poverty line income, poverty is largely rural poverty and particularly affects those in agriculture. 63 This is clear in the case of Sabah. In Sarawak, while the small indigenous groups do show a much higher incidence of poverty relative to the dominant groups, it is apparently not the case with the largest indigenous group whose poverty incidence was about the same as that of the Malays, one of the nationally dominant ethnic groups, although a numerical minority in Sarawak. However, this is probably a sampling and coverage issue. See, Kwok (2007) for Sabah, and Khoo (2007) for Sarawak. 64 It is possible that the “lesser degree” may just be a time factor as the growth in the exploitation of the natural forest wealth started in earnest at around the time that Sabah’s natural forest wealth was on the decline. 65 Figures are from Table 3.5 in the Mid-Term Review of the Fifth Malaysia Plan, 1986-90 and Table 3.12 in the Mid-Term Review of the Eighth Malaysia Plan, 2001-05, respectively. 66 Department of Statistics (2003). The growth in the share of agriculture is principally a result of the growth of plantation agriculture which, in contrast to the natural forest timber extraction sector, pays much lower wages and, as a result, depends greatly on immigrant labour. A major difference with the peninsular experience is that, in the peninsula, deforestation was accompanied by land distribution to the poor which, together with government sponsored smallholder schemes, resulted in more than half of the oil palm area being under smallholders. Such developments, together with price subsidy schemes for agricultural produce, were critical in the poverty reduction effort. In Sabah, 75 per cent of the oil palm area is under plantation; the corresponding figure for Sarawak is 80 per cent. 67 The large state of Pahang mirrors Sabah with regards to its relative standing in terms of per capita GDP over time, and for similar reasons, namely, timber extraction.

78

Despite these regional and socio-spatial disparities, the salient fact is that in policy and outcome, growth over the past four decades has resulted in a major reduction in poverty and a major improvement in the social indicators (especially education, basic amenities and health68) often associated with poverty and inequality. However, this major reduction in poverty has not been accompanied by a major reduction in inequality beyond an early and significant decline in the Gini index from about 0.513 in 1970 to about 0.486 in 1984; the Gini index has been fluctuating between 0.46 and 0.48 since.

II. Inequality

Given the assumptions of a capitalist economy, the principal concern with inequality is with income and opportunities, particularly higher educational opportunities. However, it is useful to start with a brief consideration of wealth inequality, understood as ownership of corporate assets, principally equity.

Distribution of (Corporate) Wealth

In the last quarter of 2006, there was a huge domestic controversy over the ethnic distribution of share equity ownership which was apparently a matter of concern to some segments of international capital. Hence, it may be useful to make a brief comment on the ethnic distribution of share equity ownership. With respect to the total share capital in the Malaysian Bourse, the NEP’s original target of 30 per cent bumiputera ownership69 of total publicly listed equity should have been achieved for the combined reasons of (a) the tremendous growth of the bourse since 1970 and, especially, in the 1990s, and (b) the requirement that all newly listed companies following the introduction of the NEP had to assign at least 30 per cent of issued equity at listing to bumiputera. (Over the latter point, former Prime Minister Mahathir Mohamed often lambasted bumiputera assignees for selling off their assigned shares.70)

However, it is arguable that this narrow issue of ownership of equity by ethnicity is relatively unimportant with regards to the broader policy target of approximate inter-ethnic parity (within a capitalist framework) and to the well-being and welfare of the vast majority of the population who own little or no equity.71 Rather, assuming a 68 Health issues are discussed in a separate chapter. 69 This target was established with the NEP, and set to be achieved by 1990, the putative terminal date of the NEP. However, it was not achieved by 1990 and the target remains to this day. The controversy was over whether it had been achieved and should no longer be a central policy plank. 70 This was noted in the Mid-Term Review of the Sixth Malaysia Plan, 1991-95; see, esp., pp. 68ff. and Tables 3.6 and 3.7. There is evidence that the target was reached in the 1990s on the eve of the Asian financial crisis; see Fazilah (2003), in particular, Table 8.1 which assesses ownership in terms of par value. In Parliament, on 7 November 2006, the then Deputy Finance Minister in an answer during question time provided statistics deriving from the Companies Commission of Malaysia and the Malaysian Bourse indicating that the target had been reached (Hansards 70, DR 7.11.2006). This was subsequently rejected by a Minister in the Prime Minister’s Department as “incorrect” (The Star, 13 Nov 2006), on the grounds that the figures aggregated GLCs with bumiputera ownership (probably true) and in the case of the PLCs was based on market value. But there was no retraction from the Deputy Finance Minister. The same argument cannot be applied to Table 8.1 in Fazilah (2003) but probably to Tables 8.2 and 8.3. 71 The structure and character of wealth ownership, especially of capital, affects well-being and welfare, at the decision-making level and in distributional terms. There are also implications for performance, and for state and policy capture.

79

capitalist economy in which wealth and capital ownership is highly concentrated, quibbling about putative “ethnic” share equity ownership diverts attention from the broader framework governing economic evolution and policy and their wage- and income-determining effects, which more immediately affect well-being and welfare.72

Still, a brief account of the concentration of equity ownership and control is in order. With regards to ownership, Fazilah (2003: Table 8.3) suggests that there were almost 5.4 million Malaysian shareholders in 1998. If this represented distinct individual shareholders, Malaysia would have a remarkably hihg proportion of shareholders, as the total above-20 citizen population was about 11.5 million and there were about 4 million households. However, the construction of Fazilah’s table suggests that her figure represented not distinct shareholders but distinct shareholdings, with one shareholder having multiple shareholdings. Whatever the correct interpretation of the number of “shareholders, Fazilah (2002: Tables 2 and 3) shows the very highly concentrated ownership, with over 71 per cent of the companies on the Malaysian Bourse being under the majority ownership and control of their five largest shareholders. Referring to the same period, Capulong et al. (2000: Table 1) has the largest shareholder of the average Malaysian PLC holding over 30 per cent of its shares, with the top five shareholders holding almost 59 per cent. Thus, Capulong et al (2000: 22) concluded that “the ratios would be even higher if the non-listed companies are included”.73

If ownership is highly concentrated, control is even more concentrated (Claessens et al 1999: 2000). At a 20 per cent cut-off in terms of voting rights, 67 per cent of PLCs in their sample in fiscal year 1996 were under family control, while at a 30 per cent cut-off 46 per cent were under family control (Claessens et al 1999: Table 2). Using a 20 per cent cut-off, 35 per cent of the largest 20 PLCs by market capitalisation were under family control; the corresponding percentages for the middle 50 and the smallest 50 were 69 per cent and 84 per cent respectively (Claessens et al 1999: Table 3). The top 15 families controlled at least 28 per cent of total market capitalisation (Claessens et al: 1999: Table 8).74 Moreover, through a number of strategies, such control is enhanced managerially (Claessens et al 2000). That such concentration of ownership and control of corporate wealth is a long-standing pattern is evident from a comparison with a work on the 100 largest PLCs completed almost 30 years ago (Lim 1981).

Finally, on the broader ownership of wealth, on which there is patchy data, suffice it at this time to cite Davies et al (2007) which estimated the Gini for household wealth, comprising non-financial and financial assets, at 0.733 in 2000.75

72 Although some have argued that policies on ethnic ownership of shares and the larger issue of broad inter-ethnic parity has affected economic performance, the evidence on this is mixed. 73 The in-country consultant for this report was Fazilah Abdul Samad. 74 As is clear from the Capulong et al. (2000) and Claessens et al. (1999), this degree of ownership and control is common to East Asia with the exception of Japan. La Porta et al. (1998) show that, to a lesser degree, this pattern is also found in the developed countries. 75 Such a Gini level suggests that the top 1 per cent owns some 25 per cent and the top 5 per cent around 55 per cent of total wealth. Unless the idea is to re-distribute wealth broadly, inter-ethnic parity can only mean shifting wealth among the top 5 per cent of the population.

80

Educational Opportunities

Higher educational opportunities are crucial to social mobility and its associated rewards, including access to the higher level occupations. Thus, this section focuses on this issue and, given the ethnic orientation of policy, seeks to assess its outcome before looking at the transformation of the occupational structure.

Malaysia’s record in providing educational opportunities to its citizens is very good with regards to primary and secondary education. Figure 1, summarising the overall record, indicates the scale of the achievement at the primary and secondary levels, and the substantial achievement at the tertiary level. Figure 3 inverts the x-axis by age group, thus converting age into a proxy for time; for example, the age group 45-54 in 2000 would have attended primary school in the period spanning independence in 1957, and so on. The chart limits the cut-off to age 25 in order to conveniently group all levels in one chart, as almost all have completed their formal schooling up to university level by age 25. (Note that doing so loses the information that current participation rates at the primary level well exceed 95 per cent for the relevant age cohort as a whole.)

Figure 1 Educational Attainment by Highest Certificate 2000

Source: Census 2000, 2% Sample Note: “None” means no formal education or only primary education; “Tertiary 1” refers to diplomas while “Tertiary 2” refers to degrees, including post-graduate degrees.

Figures 2 and 3 show that this achievement at the primary and secondary level has been well distributed among all ethnic groups with the exception of those groups

0

10

20

30

40

50

60

70

80

90

100

25-3435-4445-5455-6465 & over

Age Group

None Secondary Tertiary 1 Tertiary 2

81

collectively grouped together as “other bumiputera”76 (other indigenes) who would meet the current international definition of “indigenous peoples”. But even for these groups, the achievement has been substantial, bar a few pockets. Figure 2, showing the proportions of those without any certification (i.e., without formal education or with only primary education) indicates the major expansion in primary schooling, especially in the rural areas where the majority of Malays resided. The clear outlier is the “Other Bumiputera” category; even then, primary school participation rates have climbed rapidly and, on average, now approach the national average, with, as already noted, significant pockets of low participation among specific minorities.

Figure 2 Proportions of Population with no Certificate by Ethnicity 2000

Source: Census 2000, 2% sample.

76 Current official documents generally group Malays with these other indigenes as “Bumiputera”, a practice that started with the Fifth Malaysia Plan, 1986-90. This is unfortunate as it masks (i) what has been achieved with the Malays, and (ii) the extent to which these other indigenes, or indigenous peoples in the current international definition, continue to lag behind the rest of the population by a substantial margin, as will become evident. The line for “Bumiputera” is included in Figures 4, 5 and 6 to indicate this masking effect.

0

10

20

30

40

50

60

70

80

90

100

25-3435-4445-5455-6465 & over

Age Group

MalayOther BumiputeraChineseIndianBumiputera

82

Figure 3 Proportions of Population with Secondary School Certificate by Ethnicity 2000

Source: Census 2000, 2% sample.

Figure 3 above, which is a partial counterpart to Figure 2, shows the same gap the Other Bumiputera have with the rest of the population. Again, the rapid climb of the Malay population is testimony to the impact of the NEP, but the beginning of the climb predates the NEP and can be attributed to the late colonial period and the attainment of independence: the age cohort 45–54 would have made their entrance into secondary school in the period 1958–67. There was evidently not the same push for those of Indian ethnicity who started at a higher point but slowed down before recovering somewhat in the later 1980s. However, one should not read too much into this chart alone since a lower rate of attainment here can be due to either lower primary school participation and completion rates, and/or higher tertiary participation rates. For the Indians, the former is true but the latter is not, while both appear to be true for the Chinese.

In brief, allowing for some gaps, the achievement at the primary and secondary level is clear and broadly equitable, judged by inter-ethnic gaps as a measure, with the exception of the Other Bumiputera.

However, the distribution at the tertiary level (covering both diploma or Tertiary 1 and degree or Tertiary 2 categories) has been less even with regards to ethnicity. Figures 4 and 5 illustrate this graphically. This unevenness has been the reason for the edge that tertiary educational opportunities confer in Malaysia, especially since virtually all tertiary education in the country was publicly financed until the 1990s, and public tertiary education, with better facilities, remains much cheaper than private tertiary education. In addition, there were and are tertiary institutions that are essentially confined to Malays and Other Bumiputera.

In a stylised market economy, the higher income group normally has a higher participation rate in tertiary education. In Malaysia, the standard account is that the Chinese have the highest income, followed by Indians, Malays and Other Bumiputera, at least judging by their mean household incomes. However, policy intervention has spurred in the tertiary participation rates of Malays, while the expansion of tertiary education has seen an increase, albeit unevenly, in the participation rates of other

0

10

20

30

40

50

60

70

80

25-3435-4445-5455-6465 & over

Age Group

MalayOther BumiputeraChineseIndianBumiputera

83

groups. For the Indians, however, and more clearly at Tertiary 1 than Tertiary 2, there is a depression relative to their starting point. In any case, they have evidently not had the same opportunities as the others, resulting in their falling behind relatively. The same is true for the Chinese, but less so because of their capacity to seek alternatives. In the case of the Other Bumiputera, since tertiary education is the end point of the process of formal education, their much lower participation rates at primary and secondary level explain their lower rates in tertiary education. However, a more detailed examination, for example, of the Sarawak case, suggests that there may also have been perverse effects arising from the growth of the logging industry and the high wages it was able to offer from the mid-1970s to the early 1990s. This effect is suggested by the slight downtick in the 45-54 age group of the Other Bumiputera. In contrast, the uptick in the Malay curve shows the impact of the introduction of the NEP.

Figure 4 Tertiary 1 Certification by Ethnicity, 2000

Source: Census 2000, 2% sample.

0

1

2

3

4

5

6

7

8

25-3435-4445-5455-6465 & over

Age Group

MalayOther BumiputeraChineseIndianBumiputera

84

Figure 5: Tertiary 2 Certification by Ethnicity, 2000

Source: Census 2000, 2% sample

The differential access to tertiary education emerges more clearly when we consider the odds ratios of having a tertiary qualification derived from a logistic regression of tertiary qualification against ethnicity, age group and an interaction of ethnicity and age group on the 2 per cent sample of the 2000 Census.77 Of principal interest are the odds ratios for ethnicity. Table 3a summarises these ratios overall.

Table 3a Odds Ratios for a Tertiary Qualification, 2000 (Citizens only)

Level 1 Level 2 Odds Ratio Reciprocal Other Bumiputera Malay 0.30 3.34 Chinese Malay 1.27 0.79 Chinese Other Bumiputera 4.24 0.24 Indian Malay 1.20 0.83 Indian Other Bumiputera 4.02 0.25 Indian Chinese 0.95 1.05 Others Malay 1.46 0.69 Others Other Bumiputera 4.87 0.21 Others Chinese 1.15 0.87 Others Indian 1.21 0.82 Source: Generated from Annex I by JMP

By this criterion alone, the stratification shows an Others-Chinese-Indian-Malay-Other Bumiputera order leaving the Other Bumiputera at the bottom of the heap. It does not mesh with the charts shown above, but this is the overall odds ratios, allowing for age and the interaction of age and ethnicity. 77 As with the figures, the lower cut-off for age group was 25. The regression was carried out with the SAS product, JMP Version 7. Annex I provides the results.

0

1

2

3

4

5

6

7

8

9

10

25-3435-4445-5455-6465 & over

Age Group

MalayOther BumiputeraChineseIndianBumiputera

85

It is the change over time that is interesting and helps explain some of the tensions over tertiary educational opportunities. Table 3b summarises this for the three principal ethnic groups, Malay, Chinese and Indian, and the age groups 55-64 and 25-34. While there has been absolute progress for the Other Bumiputera, relative to the others, they have actually fallen behind; thus, the odds ratio for Malay:Other Bumiputera was 3.10 for the age group 45-54, rising to 4.13 for the age group 25-34.

Table 3b Odds Ratios for a Tertiary Qualification, 2000, by age group

Age Group Odds Ratio for 55-64 25-34 Malay/Chinese 0.73 0.94 Malay/Indian 0.63 1.77 Source: Computed from Annex I

The odds ratio of Malay/Chinese would probably have risen above 1.0 if not for the capacity of the Chinese to access tertiary education outside the country and, from the early 1990s, the major expansion in private (and expensive) tertiary institutions and twinning programmes. The former is indicated by the fluctuations in the Chinese population shown in Table 4, with a significant decrease corresponding to the age group at which tertiary education is pursued, namely 20–24, and a significant increase corresponding to the post-tertiary education age group, namely 30–34 – fluctuations which cannot be accounted for by other reasons than exit from the country for tertiary education (and employment) followed by return to the country upon completion.78 No definitive conclusions can be drawn about the other groups since their fluctuations can be attributed to census enumeration errors.

78 Given the pattern of variation, especially for Chinese, it seems evident that the greater proportion of the “missing” in the 20-24 age group is to be accounted for by emigration for education more than for employment. A cursory check with Australian census data on the Malaysia-born suggests that students account for the bulk of entries. Other than Singapore, Australia is the single largest destination for Malaysians. Australia was used because of easy availability of data with sufficient detail to permit some conclusions to be drawn.

86

Table 4 Population cohort in 2000 compared to

corresponding age cohort 1991 (% difference)79 Age Group

in 2000 Malay Chinese Indians

15 - 19 4.1 1.9 5.1 20 - 24 -2.1 -13.5 -0.5 25 - 29 1.1 -5.3 1.7 30 - 34 9.2 14.8 6.6 35 - 39 9.6 11.6 5.7 40 - 44 10.2 9.8 5.8 45 - 49 4.2 2.5 1.1 50 - 54 5.4 2.3 -1.7

Source: Census 1991 and Census 2000

Clearly, the relatively better economic status of the Chinese allowed them (not always without considerable sacrifice such as taking out a second mortgage on a house) to send their children abroad for tertiary education.80 While this occurred as well for Indians, the proportions were much smaller, as indicated by the differences in the population numbers of the relevant age groups in 1991 and 2000, although the differences between the age groups 20-24 and 30-34 suggest that the Asian Financial Crisis, again, had a role in reducing the number of Indians leaving the country for tertiary education. In the case of Malays, the gap between the percentage of returnees, namely the 30-34 and 35-39 age groups, and those leaving, namely the age group 20-24, is attributable to the suspension of government scholarships for tertiary education abroad. Instead, qualified candidates were placed in local public and private institutions following the East Asian financial crisis.

Finally, it is instructive to have an overview of the distribution of educational opportunities with respect to gender. Briefly, women came late to formal education for a host of reasons, including gender bias within families, but once they had access, they rapidly closed the gender gap at the primary level, started to have better transition rates to and completion rates at the secondary level, and now begin to outnumber men at the tertiary, especially degree, level. The odds ratios for tertiary qualification for gender, controlling for age group in the year 2000 are as follows: it was 4.0, male:female in the oldest 65 and over age group, but 1.2, male:female for the age group 25-34; the overall ratio for the age group 25 and above was 1.5.

In summary, the country has provided near universal access to primary education and has improved transition to, and completion rates in, secondary school. In both but especially in primary education, it has done so in broad-based fashion, compensating to a significant degree the disadvantages of lower income and social 79 Only the three principal dominant ethnic groups are shown. The equivalent for “Other Bumiputera”, mostly Sabah and Sarawak natives, is accounted for largely by labour flows, with a large proportion going to Brunei. The table was constructed by taking an age cohort in 2000, e.g., 15-19, and comparing that with the equivalent age cohort in 1991, e.g., 6-10. Thus, e.g., the age group 30-34 in 2000 is equivalent to the age group 21-25 in 1991, precisely the age group which would have been in tertiary education in 1991, while the age group 20-24 in 2000, the group in tertiary education, would correspond to the age group 11-15 in 1991. In the case of the younger age groups, it can be safely assumed that all differences are attributable to (i) movements into/out of the country, and (ii) enumeration errors, as mortality rates in those age groups would be negligible. To be safe, differences attributable to enumeration errors were taken to be ±5 per cent, thus any differences within 5 per cent were taken to be indeterminate. 80 The difference between the 20-24 age group – -13.5% – and the 30-34 age group – +14.8% – are likely to be a reflection of the impact of the Asian Financial Crisis.

87

class. The effort, in both instances, has been somewhat less successful with the population of indigenous peoples, the “Other Bumiputera”. Even there, progress has been significant, the gap in primary education has been largely eliminated,81 and the gap in secondary education is close to being eliminated. Less successful, and with significant inequities, has been the effort in tertiary education, despite a huge expansion in opportunities. This is especially marked for the Indian and Other Bumiputera segments of the population.

Occupational distribution

While it is obvious that occupation and education are correlates, it is good to see this emerging very clearly from the data (Figure 6). The secondary school qualification trend shows a double hump because lower and upper secondary qualifications are combined here. But separating them would still produce a double hump: for the upper secondary, there would be a higher peak around occupation groups 3 and 4 and a lower peak at occupation group 8; for the lower secondary, there is a higher peak at occupation group 8, and a lower peak around occupation group 5.82 Since these occupation groups also correspond to earnings, it is clear that access to educational opportunities, occupational distribution and income distribution are different ways of looking at, and approaching, the issue of equality and inequality. Thus, it was rational for the NEP to push employment in the modern sector, at least as a short-term measure, and develop educational access, especially to higher education as a medium- and longer-term measure. But as was previously shown, implementing the latter measure resulted in considerable inequity to other groups, partly because of the ethnic composition of the population: the principal target group comprised more than half the population.

81 Not seen in the figures above, but evident in a primary school participation rate chart, extended to the 15-19 age group in 2000, i.e. the age group when everyone would have completed primary schooling. 82 See the note to Figure 7 for an explanation of the occupation groups.

88

Figure 6 Distribution of Occupation Group by Educational Attainment, 2000

Primary or less Secondary

Tertiary – Certificate/Diploma Tertiary – Degree

Source: Census 2000, 2% Sample

The outcome of policy has been tremendous changes in the distributional structure of occupation and in the composition of employment and occupation. While broad comparisons between 2000 and 1970 are possible, category-for-category comparisons are difficult due to changes in the system of classification of occupations. However, an approximation can be obtained by using age group as a proxy for time, thus relying on a single system of classification, and avoiding the problems of concordance, with relatively minor disadvantages owing to occupational mobility over time. Figure 7, derived from the 2000 Census, illustrates the transformation in the distributional structure of occupation, roughly over a 40-year period. The age group 15-

89

24 has been included for the sake of completeness. For the purposes under consideration, that group should be ignored because:

i. it will naturally have a much smaller proportion of Group 2, an occupational category which generally requires a degree, and Group 1, a category which often recruits from Group 2 and typically requires some level of experience

ii. it is not fully representative of its age cohort as it contains those initial entrants into the labour force with a lower average level of educational attainment relative to the total age cohort, with the employed comprising only 37 per cent of the age cohort, compared to 68 per cent in the case of those aged 25-34, and

iii. it is a transitional group although the majority of its entrants will probably end up in the lower half of the occupational hierarchy.

Figure 7 Occupational Distribution by Age Group, 2000

Source: Census 2000, 2% sample. The above includes all employed, including non-citizens.

Note: Group 1=Managers (including SME managers), Legislators & Senior Officials; Group 2=Professionals; Group 37Associate Professionals & Technicians; Group 4=Clerical Workers; Group 5=Sales Workers; Group 6=Agriculture, Fishing & Forestry; Group 7=Crafts & Related; Group 8=Plant and Machine Operators & Assemblers; Group 9=Elementary Occupations

The principal changes have been a movement out of agriculture-related occupations, and a movement into professional, associate professional, clerical work and plant and machine operators and assemblers. Mobility into the highest occupational group is, in part, a function of work experience, entrepreneurship (for small and medium-scale enterprises, SME’s) and, frequently, professional jobs. Entry into the

0% 20% 40% 60% 80% 100%

15-24

25-34

35-44

45-54

55-64

All

Ag

e G

rou

p

% of Employed in Age Group

1 2 3 4 5 6 7 8 9

90

professional occupations (Group 2) and associate professional occupations (Group 3) is principally dependent upon educational attainment, reflecting the expansion in higher education opportunities discussed previously. The same, but requiring a lower level of educational attainment, is true of clerical occupations (Group 4) and sales occupations (Group 5). Elementary occupations (Group 9) generally do not require much educational attainment, but crafts and related occupations (Group 7) and plant and machine operators and assemblers (Group 8) now generally require at least a lower secondary education, combined with apprenticeship, or some formal pre-job training or on-the-job training.

The Malaysian Standard Classification of Occupations 1998 (MASCO-98) used in 2000 is based on ISCO-88. Hence, it also approximates a class and income structure. Thus, Groups 1 and 2 comprise upper-class and upper-income occupations, Groups 3-5 and 7-8 are broadly middle-class and middle-income occupations, and Groups 6 and 9 are lower-class and lower-income occupations. This is indicated by the income decile distribution of these major occupational groupings (Figure 8).

Figure 8 Major Occupation Groups by Income Deciles, 2004 Group 1 Group 2

Group 3 Group 4

91

Group 5 Group 6

Group 7 Group 8

92

Group 9

Source: Household Income Survey, 2004.

In combination, Figures 7 and 8 indicate the extent of economic mobility over the past three to four decades, thus explaining the extent of poverty reduction and increase in real incomes, given the income decile distribution of agricultural occupations.

With regards to the interethnic objectives of policy, the level of achievement can be gauged by the composition of employment covering the standard labour force (Figure 9), and the variation by age group (Figure 10). Figure 10 has been limited to the employed aged between 25 and 54, as the formal retirement age was 55 in 2000, while it can be safely assumed that by age 25, a relative stability in occupation, other than for movement into Group 1, has been attained. Both figures refer only to citizens.

93

Figure 9: Occupational Distribution by Ethnicity, 2000

Source: Population Census, 2000

0 20 40 60 80 100

Citizens

Malays

Other Bumiputera

Chinese

Indians

Others

123456789

Per cent

94

Figure 10 Occupational Distribution by Ethnicity and Age Group, 2000

Malays Other Bumiputera

Chinese Indians

Source: Population Census, 2000

As the analysis using the grouping of occupations into high, middle and lower class/income occupations shows, there has been a movement out of lower income occupations into middle income and, to a lesser degree, higher income, occupations.83 If the assumptions of age group as a proxy for time are acceptable, Figure 11 shows this mobility. Thus, the oldest 55–64 age group reflects the situation going into the 1970s, the 45–54 the situation going into the 1980s, the 35–44 going into the 1990s and the 25–34 going into the millennium. The 55–64 age group is a relatively poor reflection of the situation due to the retirement age of 55 which eliminates from the employed a majority of persons in government employment; it is included for the sake of completeness.

Together the charts suggest that the mobility by all citizen groups has been facilitated by the entry of a large number of foreign workers who took up jobs at the bottom of the occupation/income hierarchy. This is often overlooked in many discussions as there is a tendency to exclude non-citizens from analysis.

83 The analysis in Milanovic (2006) suggests that the middle income group might comprise only Groups 3-4, while the lower income group would comprise Groups 5-9; see his Tables 15 and 17. However, the pre-2000 occupational classification differs from that in the 2000 Census and subsequently; the occupation by income decile charts shown above are likely to be a better guide.

95

Figure 11 Ethnic Composition of Occupational Hierarchy by Age Group

55-64 45-54

35-44 25-34

Source: Population Census, 2000. Note that “Others” includes non-citizens.

Additionally, the gross overlap between occupation and ethnicity – as between the two major ethnic groups – that existed in 1970 has been largely eliminated, as measured by the broad occupational groups, at the 1-digit level, of the ISCO-88 based Malaysian Standard Classification of Occupations 1998 (MASCO-98), using the proportional equality index (PEI).84 In two major occupational groupings the Chinese continue to predominate, namely Group 1 (managerial, legislative and senior administrative) and Group 7 (crafts and related occupations, that is, skilled labour). At the 2-digit level (not shown), and other than in agriculture, policy has resulted in significant Malay ‘over-representation’ in some occupations, such as teachers and nurses. In some occupations there is still ‘under-representation’ and, of course, the problem persists with other ethnic groups, particularly the indigenous minorities. This ‘disparity’ is most evident in agriculture, a function of land laws as well as of the disadvantaged state of agriculture in

84 The PEI is calculated as the proportion of employment in occupation group to proportion of total employment, not to proportion of total labour force, but the differences are small, given the low unemployment rate. It should be noted that the PEIs in Table 6b in Jomo (2004) are obviously wrong, as it suggests that the Bumiputera share of the labour force was 66 per cent in 2000 when it was more like 57 per cent, excluding non-citizens. As a result, it underestimates the PEIs for bumiputera.

0% 20% 40% 60% 80% 100%

1

2

3

4

5

6

7

8

9

Employed

Maj

or O

ccup

atio

n G

roup

Malay Other Bumiputera Chinese Indian Others

0% 20% 40% 60% 80% 100%

1

2

3

4

5

6

7

8

9

Employed

Maj

or O

ccup

atio

n G

roup

Malay Other Bumiputera Chinese Indian Others

0% 20% 40% 60% 80% 100%

1

2

3

4

5

6

7

8

9

Employed

Maj

or O

ccup

atio

n G

roup

Malay Other Bumiputera Chinese Indian Others

0% 20% 40% 60% 80% 100%

1

2

3

4

5

6

7

8

9

Employed

Maj

or O

ccup

atio

n G

roup

Malay Other Bumiputera Chinese Indian Others

96

the national and world economy, making it unattractive to Chinese and Indians. All this is summarised in Table 5. Given the hierarchy of occupations, it is ‘better’ to have a PEI less than 1 in occupations further down, and vice-versa for those higher up.

Table 5 Occupation Group by Ethnicity, 2000 (%)

Occupation Group Malay Other

Bumiputera Chinese Indian Others Percent

of Employed

1

PEI

37.3

0.82

2.9

0.31

48.8

1.80

6.3

0.80

4.6

0.46 6.9

2

PEI

53.5

1.17

4.3

0.46

31.5

1.16

7.4

0.94

3.2

0.32 5.8

3

PEI

55.3

1.21

6.9

0.73

26.3

0.97

8.6

1.09

2.9

0.29 11.9

4

PEI

52.3

1.15

6.0

0.64

31.3

1.15

8.1

1.03

2.3

0.23 9.6

5

PEI

45.4

1.00

8.4

0.89

33.8

1.25

6.2

0.78

6.1

0.62 13.0

6

PEI

41.9

0.92

26.2

2.79

10.5

0.39

3.5

0.44

17.9

1.81 14.4

7

PEI

34.8

0.76

6.8

0.72

45.0

1.66

5.9

0.75

7.5

0.76 9.4

8

PEI

50.6

1.11

6.1

0.65

16.7

0.62

13.7

1.73

12.9

1.30 15.8

9

PEI

38.7

0.85

8.6

0.91

22.3

0.82

9.3

1.18

21.1

2.13 13.0

Percent of Employed 45.6 9.4 27.1 7.9 9.9

Source: Census 2000, 2% Sample.

Here, an important issue is the level at which equity may be said to have been achieved. Is it at the level of the broad occupational groupings, disregarding vertical inequalities? Should policy even attempt to achieve parity at the level of detailed occupational groupings? Or should attention be directed instead to the remuneration gaps between different occupational groups, whether at the broad or detailed level, measured by, say, the ratios between the top occupational group to the bottom, or the top two occupational groups to the bottom two, as MASCO-98 largely sorts occupations into a hierarchy of income, education and status? In brief, should social policy be stuck with a concern over inter-ethnic parity or should it now transition to concern over a

97

broader social inequality, while still addressing ethnic parity where it remains urgent, such as with the ‘Other Bumiputera’?

Finally, despite the attention focused on parity in the narrowly professional occupations – defined as accountants, architects, dentists, medical doctors, engineers and veterinary surgeons – and the reported lack of parity,85 it appears that here, too, parity, or near-parity has been reached, but not in every single occupation, a major one being accountants. The issue is one of appropriate analysis. Is it appropriate to compare across all age groups? Would it be more appropriate to look at the movement over time or controlled for age, since few would enter these professions at the older age groups? And would temporal trends not be the most important as they point to the direction of change? These questions are raised by the data in Table 6.

85 The phrasing on page 333 of the Ninth Malaysia Plan 2006-2010, is confusing: “Excluding lecturers, pre-university and secondary school teachers as well as writers and artists, the proportion of Bumiputera in the professionals category was 47.5 per cent in 2005 compared with 77.6 per cent among the Chinese and 69.2 per cent for the Indians. The share of Bumiputera professionals registered in the eight selected occupations increased from 35.5 per cent in 2000 to 38.8 per cent in 2005, as shown in Table 16-5.” The first sentence means that Bumiputera in the professional category excluding the excluded occupations comprised 47.5 per cent of total Bumiputera in the professional category, and so on. Some points to be noted: first, the professional category is one generally requiring a degree or better, and the grouping of Malay and Other Bumiputera, as should be clear from the preceding discussion, is somewhat misleading. Secondly, the excluded occupations are precisely those occupations which have seen discrimination against the others, thus inevitably pushing them into other occupations. Thus, bumiputera make up 75 per cent of those in the excluded occupations. Thirdly, the “professionals registered in the eight selected occupations” is not the same as professionals in those occupations, as registration is not a necessity except for certain functions.

98

Table 6 Proportional Shares (%) in Professions by Ethnicity and Age Group, 2000

Malay Other Bumiputera Chinese Indian Others, incl.

non-Citizens

15-24

Employed

PEI**

46.0

47.3

0.97

4.5

10.0

0.45

37.7

21.7

1.74

9.7

8.5

1.14

2.1

12.5

0.17

25-34

Employed

PEI

48.1

45.0

1.07

2.2

9.0

0.24

39.2

25.6

1.53

7.9

7.4

1.07

2.6

13.0

0.20

35-44

Employed

PEI

42.8

45.7

0.94

5.2

8.9

0.58

37.0

28.1

1.32

10.1

9.0

1.12

4.9

8.3

0.59

45-54

Employed

PEI

31.1

46.1

0.67

3.8

8.7

0.44

50.5

32.6

1.55

10.5

8.0

1.31

4.1

4.7

0.87

55-64

Employed

PEI

15.5

44.2

0.35

2.8

11.1

0.25

54.9

35.8

1.53

19.7

4.5

4.4

7.0

4.5

1.56

All Age Groups in Professions

43.8

(44.9)

3.5

(3.6)

40.0

(41.1)

9.2

(9.5)

3.4

(1.0)

Total Employed 45.6

(50.1)

9.4

(10.4)

27.1

(29.8)

7.9

(8.7)

9.9

(1.1)

PEI 0.96

(0.90)

0.37

(0.35)

1.48

(1.38)

1.16

(1.09)

0.34

(0.91)

Total Employed LFS 2000* 56.4 32.5 9.0 2.0

All Age Groups in Professions, 2000* 35.5 51.0 12.0 1.3

Source: Census 2000, 2% sample; *Ninth Malaysia Plan Tables 16.4 and 16.5, respectively, in Malaysia (2006), derived from the Labour Force Survey (LFS), 2000.

**PEI = Proportional Equality Index for the age group and overall

Note: The proportions in the last two rows are exclusive of non-citizens, whereas the Census 2000 sample is inclusive of non-citizens, except in the two rows of “All Age Groups” and “Total Employed” where the numbers in brackets refer to percentages excluding non-citizens.

The discrepancy between the proportions from the analysis of the 2 per cent sample of the Census and that reported in the Ninth Malaysia Plan should be noted. It could be due to sampling error, errors and differences in classification and coding of occupations and/or treatment of the unknown and insufficient information entries, or

99

that the analysis from the Census 2000 sample does not distinguish registration with the professional bodies, i.e., an engineer is counted as such, regardless whether that person is registered with the professional body. However, the proportions of total employed are not far apart, generally within 4 per cent, once non-citizens are excluded.

For consistency, the discussion is restricted to the Census sample, given the unavailability of unit data for the Labour Force Survey (LFS) and of the distribution by age group. Of importance are the differences between age groups as a proxy for time, and there is no reason why the trends shown by the Census sample should differ grossly from those in the LFS.86

At the level of totals, that is, averaging across all age groups, the proportional equality index (PEI) suggests that while Chinese continue to enjoy an advantage, the disproportionality the Malays experienced in the past has been largely eliminated. Other Bumiputera remain grossly disadvantaged by this measure. The trend, by age groups from 45–54 to 25–34, including or excluding non-citizens, is clear. Again, the PEI shows that while the Chinese have maintained their advantage, the Indians have lost theirs, and the Malays have progressed rapidly. There is no clear trend with Other Bumiputera, possibly because of the sample as, given the total population of Other Bumiputera and their heavy presence in agriculture, a 2 per cent sample results in small numbers in other cells. The PEI for Others (including non-citizens) is a story of the character of non-citizens, i.e., immigrant workers. The younger age groups tend to be slated for the lower levels of the occupational hierarchy, and they come mainly from within the region; the older age groups contain a substantial proportion of “expatriates”, in the common sense of the term, in the professional categories, and they often come from developed countries.

Income distribution

Within national discourse, two considerations with regards to income distribution: (i) the overall distribution and inequality trends, and (ii) the inter-ethnic distribution and its disparity trends – overshadow all others such as gender, although location/state has fared better. Within politics, the inter-ethnic dimension is especially prominent. The discussion in this section is thus focused on these two considerations.

The usual account87 of the overall distribution has it that inequality (measured by the Gini) worsened from 1957 to the end of the 1960s, further deteriorated initially in the 1970s as the NEP’s impact was felt, but then improved to the end of the 1980s before worsening again in the 1990s. Periods of worsening correspond broadly with growth periods, and those of improvement with economic downturns. The basis for this account has been household incomes derived from various surveys,88 and the income

86 Combining data from the various Malaysia Plans to get a time series does indicate a similar trend. Nevertheless, it can be argued that without preferential admissions, the trend would be reversed. This is a counter-factual that would need to be tested, but given the social changes since 1970, it does seem unlikely. There will be variation among the various professions, but if this is an outcome of choice and disposition, it should not be an issue. 87 See, e.g., Ragayah (2003; 2008b), Jomo (2004).. Shireen (1998) has a detailed account up to 1989. Fields and Soares (2002) cover the period 1970-1997 with access to unit data and were able to perform their analysis at the per capita household income level. 88 There are both sample and income concept issues with the pre-1970 data and Anand (1983) has seriously questioned their use, including the adjustments by Snodgrass (1980) which forms the basis for the first period in the usual account. The one consistent data set for the whole

100

used for the assessment being gross household income from all sources, including transfer payments.

However, Fields and Soares (2005), using per capita household income, and subjecting the data to various approaches, concurred with the usual account, showing a drop of 5 per cent in the Gini from 1984 to 1989 and a rise of 8 per cent from 1989 to 1997. Yet, the details show that this account rides on the decline in incomes of the top three centiles in the mid-1980s recession, and their massive recovery in the subsequent boom to 1997. Of course, the first period in this account begins with the mid-1980s recession while the second period ends just before the 1997 East Asian financial crisis. Figure 12 illustrates this account for the period 1984-1997. It shows the per capita income shares for the bottom six deciles rising, and then falling, as well as a reverse trend for the topmost decile.

Some caution is necessary in interpreting the summary Gini coefficients behind the usual account, although it supports the idea that growth alone is insufficient to address inequalities. The broad correlation of declining inequality with economic downturns and vice-versa captures a broad picture that is drawn on statistical blips, while registering that those with lower incomes benefit from a substantial safety net, made up of price controls on what are deemed essential items, subsidies and price supports for some agricultural products, etc. Moreover, since none of the reported data records standard errors, some of the changes are small enough that they are likely not to be statistically significant. Additionally, since the Gini is typically used to measure inequality, the characteristics of the Gini and its sensitivity to movements in the middle as well as to different modes of calculation, e.g., on quintiles, deciles or unit data, must be kept in mind.

It is clear that the Gini dropped from around 0.51 in the 1970s to about 0.45 in the mid-1980s. It has since oscillated around that level. It dropped to a low of 0.44 in 1999, in the immediate aftermath of the financial crisis, rose again in 2004, but mostly stayed above 0.46.89 In short, the usual account, other than for the large drop in the initial period, hinges on relatively small changes in the Gini, even if the Gini is high compared to, say, South Korea or Taiwan.

country is the household income surveys, initiated in earnest in 1984 and conducted twice every five years, the most recent in 2007. The only somewhat comparable data set pre-1984, and then only for Peninsular Malaysia, was the income survey conducted in tandem with the 1970 census post-enumeration survey, and the basis of a comprehensive analysis by Anand (1983). The 1980 household income survey, with reference year 1979, covered the whole country but had a much smaller sample than the subsequent surveys; it was, in effect, a test run. In any case, not much data is available from this, other than what was made available in Shireen (1998). 89 Ragayah (2008b: Table 1) has usefully collated the time series, including for urban and rural, and this table is the basis for the discussion in the following paragraphs. Note that Fields & Soares (2005) have slightly different Gini’s based on per capita household income. Note that in contrast to the usual account, the ADB’s estimates show Malaysia’s Gini as decreasing over the period 1993-2004 (ADB, 2007:Table 2.5), indicating the sensitivity of the usual account to choice of beginning and end points.

101

Figure 12 Share of Income by Deciles, 1984-1997

Source: World Bank, PovcalNet at http://iresearch.worldbank.org/PovcalNet/jsp/index.jsp

Note: The y-scale is a log scale.

In other words, after an initial period of substantial reduction, inequality has remained stubbornly around the same level. This “stubbornness” is largely attributable to a partial reversal, after an initial reduction, of urban-rural disparities and to the failure to address intra-urban inequality, other than briefly under the tight labour market of the mid-1990s, towards the end of the pre-crisis boom.

Mean incomes, of course, rose significantly in that period,90 making Malaysia an upper-middle income country in the World Bank’s classification.

Mean rural incomes, in current prices, rose 4.6 times from 1970 to 1990, compared to 3.9 times for mean urban incomes. However, from 1990 to 2004, mean rural incomes only rose 2.0 times, compared to 2.5 times for mean urban incomes. This slippage in rural income growth, relative to urban income growth, accounts for the increase in urban-rural disparity in the latter period, virtually back to the levels of the 1970s. It is partly a reflection of a reorientation of emphasis to mostly urban-based industrial and services development from the late 1980s.

Rural inequality has seen a downward trend: a substantial decline up to 1990, followed by a partial reversal in the latter half of the 1990s, and a further decline to

90 Nominal mean household incomes increased 10-fold in that period (Ragayah, 2008b: Table 1). Leete (2007: Table 4.6) has real mean household incomes rising by between 5-7 times between 1970 and 1999, and mean per capita household incomes by 7-8 times for the same period.

1

10

100

1 2 3 4 5 6 7 8 9 10

Deciles

198419871989199219951997

102

2004. This should be treated with some caution owing to the vagaries of commodity prices and the exclusion of foreign workers from the publicly available tabulations. It is probable that including the foreign workers will negate at least part of this downward trend, as they tend to occupy the lower levels of the occupational/income, hierarchy.91 Urban inequality also declined significantly to 1990, and continued to decline into the latter half of the 1990s, before increasingly sharply to 2004 back to the level of 1990.

Seen in terms of disparity ratios, these urban-rural (and state-location) patterns appear to account for a significant proportion of the overall increase in inequality to 2004 and, probably, for a significant proportion of the inter-ethnic pattern, given the continued overlap between ethnicity and location. Figure 13 compares the changes in relative positions to the national mean, and to the richest and most populous state, Selangor, by household income. The figure illustrates both the “stickiness” of relative standing and the decline of most states relative to Selangor.

91 The urban-rural gap would have been narrower than indicated by these figures given urban-rural differentials in price inflation. However, for this period, there was only a single CPI. In any case, the exclusion of foreign workers likely raised the reported mean rural incomes in the latter period, and to a greater degree than urban incomes, with over half of foreign workers in the low-wage agricultural and elementary occupations.

103

Figure 13 Relative standing of states by mean household income, 1990-2004

Relative to national mean household income

Relative to Selangor mean household income

Source: Ragayah (2008b), Table 2

The use of household incomes rather than individual earnings is an issue, as household incomes can have a number of confounding factors including the size and composition of households, number of income earners, and so on.92 However, owing to the general unavailability of unit data, most discussions of income distribution and inequality in Malaysia have depended on the published household income statistics. One exception is a recently published paper by Milanovic (2006) which provides a detailed study based on unit data for the period 1984 to 1997, and an analysis by income earners.

92 Anand (1983:67ff.) has an extensive discussion of this.

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Johor

Kedah

Kelantan

Melaka

N Sembila

n

Pahan

gPera

kPerl

is

Penan

g

SELANGOR

T'ganu KL

Sabah

Sarawak

State

199019972004

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Johor

Kedah

Kelantan

Melaka

N Sembila

n

Pahan

gPera

kPerl

is

Penan

g

Selangor

T'ganu KL

Sabah

Sarawak

State

199019972004

104

Another is the analysis by Fields and Soares (2005), also based on unit data for the same time period. Unfortunately, Fields and Soares (2005) do not provide an inter-ethnic analysis. Leete (2005: 166-67, Table 4.6) shows that although inter-ethnic ratios of mean household incomes have significantly closed, they have not closed as much on a per capita household income basis; indeed, those have widened since 1990, owing to differences in inter-ethnic fertility patterns, hence household sizes.

The general focus on inter-ethnic comparisons tends to downplay intra-ethnic and general inequality. Indeed, as Zainal (2005) notes, no targets were set for income inequality, although it is evident that there is a target to achieve inter-ethnic parity at the mean.93

Finally, officially published data for the most part groups Malay and Other Bumiputera together under the single category of Bumiputera. As would be evident by now, this category groups two significantly different groups, masking the underprivileged status of the one and, possibly, the achievements of the other, even in terms of inter-ethnic parity at the mean. However, given the small population of Other Bumiputera, the latter effect is not as evident as the former. In the absence of unit data, it is not possible to decompose this and many analyses have taken it as a given. The preceding discussions suggest there is a substantial gap between Malay and Other Bumiputera and this must be kept in mind in the following discussion of inter-ethnic income disparities based on the category of Bumiputera. The extent of the differences is evident from the data for 2007 recently made available in Parliament. This is summarised in Figure 14 by way of the Proportional Equality Index – the relevant ethnic percent in an income category relative to the total citizen population percent in the same category; a ratio of 1 means proportionality of the ethnic percent in an income category relative to the total citizen population.

93 The potential consequences of this are discussed in Jomo (2004).

105

Figure 14 Proportional Equality Index Ethnic Group by Income Category, 2007

Source: Data released in Parliament, 11 Nov 2008, by Deputy Minister Devamany, and kindly made available by MP Dr Michael Jeyakumar Devaraj.

Figure 15: Proportional Equality Index Ethnic Group by Income Category, Peninsula Malaysia, 1970

Source: Anand (1983), Table 3.1

Figure 14 implies that, at the household level, there are substantial inter-ethnic differentials when taken at unadjusted household incomes by ethnicity. Figure 15, for Peninsula Malaysia only, shows the extent to which income mobility has occurred for Malays, pushing their proportional equality index in the lowest income category down

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

<100 100-200 200-500 500-1000 >1000Income Category (RM)

MalayChineseIndian

0.0

0.5

1.0

1.5

2.0

2.5

<1000 1001-2000 2001-3000 3001-4000 4001-5000 5001-10,000

10,001-20,000

>20,000

Income Category (RM)

MalayChineseIndianOthers

106

from 1.5 to around 1.2, and lifting it for the highest income category from under 0.3 to 0.6. Most notable of all is the creation of a Malay middle income class.

Subject to the earlier caveats, it is useful to examine the Bumiputera/Non-Bumiputera mean household income disparity in some detail. Meerman (2008) attempts to decompose this into urban and rural components, suggesting that the disparity ratio in the urban areas is considerably smaller than suggested by the overall ratios, implying the principal disparity is the urban-rural one, with corresponding policy implications. His calculations yielded an urban non-Bumiputera/Bumiputera mean household income disparity ratio of 1.3 in 2004, compared to an overall ratio of 1.6, and he suggested that a significant proportion of this urban disparity could be accounted for by differentials between public and private sector remuneration.94 Indeed, even in 1970, urban disparities were much smaller than the overall disparities: Anand (1983: Table 3.14) had Chinese-Malay disparities of 1.18 for metropolitan areas and 1.52 for towns, and for corresponding Indian-Malay disparities at 1.15 and 1.20 respectively.

Meerman’s approach is useful in the absence of data than the distribution of population by strata and mean household incomes by ethnicity and by strata. However, there is, in fact, some data, in Table 7, to check this directly. Table 7 validates Meerman’s calculations, as a weighted average of Chinese/Bumiputera and Indian/Bumiputera disparity ratios will show. His method is useful when appropriate data is available. Unfortunately, there is no publicly available data to perform the same calculations for 2004 as for the other years. Nevertheless, a few points stand out:

• urban inter-ethnic disparity ratios have been fairly stable, with variations in the second decimal place; however, it has probably narrowed significantly in the period to 2004, as that is the only way to account for the narrowing of the overall inter-ethnic ratios given the widening of the urban/rural ratio

• rural inter-ethnic disparity ratios narrowed • urban/rural disparity ratios narrowed considerably to the late 1980s, only to widen

again, returning to almost the same ratio as in 1970; this widening held across all ethnic groups, and

• the principal contribution to the apparent widening of the overall inter-ethnic ratios to 1997, after an initial period of significant narrowing, comes from a widening of all combinations of the urban/rural ratios. This suggests that the issue of inter-ethnic gaps, today as in 1970, is principally an issue of urban-rural differentials and secondarily of inter-ethnic urban differentials. This is reinforced by the 1997-2004 ratios when overall inter-ethnic ratios narrowed alongside widening urban-rural ratios, suggesting a further narrowing of urban inter-ethnic differentials.

94 Without going to the unit data, it is not possible to verify this. Milanovic (2006) shows that at the level of individual earners, public sector employment carried an income premium in 1997. If so, then adjusted public-private ratios would be larger than unadjusted, and in so far as the government sector is predominantly Malay, this would impact on inter-ethnic ratios.

107

Table 7 Mean Household Income Disparity Ratios, 1989–97

1970 Peninsula

1989 1989 Peninsula

1995 1997 2004

Chinese/Bumiputera 2.29 1.74 1.70 1.80 1.83 1.64

Indian/Bumiputera 1.77 1.29 1.29 1.33 1.42 1.27

Urban Chinese/Urban Bumiputera 1.40 1.40 1.41 1.46 1.47

Urban Indian/Urban Bumiputera 1.32 1.14 1.17 1.13 1.19

Rural Chinese/Rural Bumiputera 2.22 1.66 1.58 1.70 1.78

Rural Indian/Rural Bumiputera 1.58 1.20 1.21 1.25 1.35

Urban Bumiputera/Rural Bumiputera

2.19 1.61 1.60 1.82 1.85

Urban Chinese/Rural Chinese 1.38 1.35 1.42 1.56 1.53

Urban Indian/Rural Indian 1.83 1.53 1.55 1.63 1.63

Urban Bumiputera/Rural Chinese 0.98 0.97 1.01 1.07 1.04

Urban Bumiputera/Rural Indian 1.39 1.35 1.33 1.45 1.37

Urban Chinese/Rural Bumiputera 3.06 2.25 2.25 2.65 2.72

Urban Chinese/Rural Indian 1.94 1.88 1.87 2.11 2.02

Urban Indian/Rural Bumiputera 2.88 1.83 1.87 2.04 2.20

Urban Indian/Rural Chinese 1.30 1.10 1.18 1.20 1.23

Urban/Rural, Citizens only 1.68 1.95 1.97 2.11

Urban/Rural, all 2.14 1.70 1.72 1.98 2.04

Source: For 1970, calculated from Anand (1983: Tables 3.11 and 3.14); for 2004, Malaysia (2006: Table 16.3); for other years, calculated from Malaysia (1996: Table 3.6; 1999: Table 3.3) and Shireen (1998: Tables 4.11–4.13, 4.18). For 1970 and 1989 Peninsula only, Bumiputera can be read as synonymous with Malay.

Ethnic means, and interethnic comparisons on the mean, mask the substantial income inequality in all ethnic groups: the Gini’s range from 0.43–0.45 in 2004, down from the 1970s and 1980s, but up from 1990, and are largest for the bumiputera group. Thus, the intra-ethnic ratios between those at the top of the income distribution and those at the bottom are broadly similar, as shown in Table 8.95 But they are largest for the bumiputera although this is likely to be the outcome of the grouping of two components with widely differing income distributions, as previously shown in Figure 14.

95 The numbers are purely illustrative as we are taking the income share of the top 20 per cent of households relative to the bottom 40 per cent. The actual gap is wider, approximately double the figure shown.

108

Table 8

Intra-ethnic disparities Ratios of Top 20% to Bottom 40% shares of income 1970–2004

Year Malay/Bumiputera Chinese Indian 1970* 4.1 3.8 3.8 1984 3.9 3.7 3.0 1990 3.3 3.4 2.9 1997 3.6 3.4 3.1 2004 3.6 3.5 3.1 Source: Ragayah (2008b: Table 3) *Refers to Peninsula Malaysia only

This substantial intra-group inequality cautions that it is not especially meaningful to draw broad conclusions about the relative standing of ethnic groups, particularly when the inter-ethnic ratio at the mean is relatively small – for example, between Indian and Bumiputera, as can be seen from Figure 14. However, given the very different distribution of Chinese across the income scale, the ratios are meaningful in the case of the Chinese-Malay ratios. Moreover, although ratios have declined, i.e., the relative gap has closed, the absolute gap has opened up. Even so, it does not mean that, today, in contrast to a generation ago, the appropriate policy to narrow inter-ethnic gaps should be ethnic-based rather than income-based.

Finally, it is arguable that the issue of inter-ethnic disparities should be viewed through the prism of income earners, rather than at the level of households, or even per capita households. The most recent analysis available is for 1997, in Milanovic (2006). Once adjusted for earnings determinants, it turns out that adjusted disparities (i.e., controlling for education, work experience, location, occupation, etc.) are significantly smaller than unadjusted ones. Indeed, once an adjustment is made for these usual factors, there turns out to be no difference in earnings for Indians relative to Malays. For Chinese, there remains a premium of 23 per cent, if the government sector is not taken into account, or 25 per cent, if government sector is taken into account, as compared with 46 per cent, when unadjusted. Under an Oaxaca decomposition, the premium rises to 31 per cent. In the government sector, all else being equal, the Malays enjoy a premium over the Chinese.

On the face of it, the Chinese premium suggests labour market discrimination, and such an analysis is a standard way of assessing discrimination (Oaxaca, 2007). However, as Milanovic notes, without further enquiry, this is a technical discrimination and might possibly be explained by unobserved characteristics, rather than a social bias or actual discrimination. It is something that merits further investigation.

However, it is of interest to note that the premium men enjoy over women, under the same analysis, is even larger, amounting to over 50 per cent; conversely, women suffer a 36 per cent deficit, all else being equal.

III. Conclusion

Malaysia’s record in social re-structuring, in the context of an ethnically divided society, is a formidable one. In the course of a generation, it has succeeded in lifting all groups and reducing the gaps between them in the areas of health, education, occupation and industry. This has not been without its costs, especially in education and in higher education – a cost that has been borne disproportionately by the small minority Indian

109

population. Nor has it been even, with the minority indigenous communities generally falling behind with regards to education and, hence, occupation.

The record is less striking in income, specifically inter-ethnic income, re-structuring. Mean incomes have risen considerably for all groups. Although inter-ethnic gaps at the mean have narrowed, they have narrowed much less than in the non-income measures of health and education, and have narrowed less at the per capita household level than at the household level. However, looking only at income earners, inter-ethnic gaps are considerably narrower than either at the inter-ethnic mean household or mean per capita household level. As elsewhere, income, and specifically inter-ethnic income, inequalities have proven to be somewhat “sticky”; it is a significant achievement that these have been reduced to around 25 per cent, for Chinese-Malay disparity, and to nothing for Indian-Malay disparity.

But this is also, in part, a class-ethnicity-location effect. While there is a target for inter-ethnic disparities at the mean, there has never been a target for addressing overall inequalities which, arguably, would do more to reduce measured inter-ethnic disparities than the more narrow focus on the mean and on upper-income occupations.

Locational, or inter-state, inequality, which overlaps with strata, or urban-rural, inequality is persistent. For the latter, the gap is large enough to swamp effects due to differences in cost of living – which is not always so with the former. Nevertheless, relative to the national mean, the positions of states are, for the most part, persistent over time, with some notable exceptions. However, relative to the richest state in the country, all others have fallen behind, although it is probable that the gap, if adjustments are made for differential living costs, is smaller than the unadjusted figures suggest.

Finally, gender earning differentials are considerably larger than inter-ethnic earning differentials. In 1997, men had a 56 per cent premium over women, all else being equal, with the premium (or disadvantage for women) greater for Chinese than Malay. This has apparently declined over time, but it has not received the attention it deserves.

In both ethnic and gender instances, this suggests some form of “discrimination” favouring Chinese and favouring men. Milanovic (2006: fn 28) notes that this could be so in a “technical” sense – possibly attributable to unobserved variables – rather than being due to actual discrimination or social bias. The issue merits further exploration as to the factors that may account for it, and whether it has been falling over time. Conversely, there is a Malay premium to being in the government sector, relative to Chinese, which likewise merits further exploration.

110

References

Ahuja, V., Bidani, B., Ferreira, F. & Walton, M. 1997. Everyone’s Miracle? Revisiting Poverty and Inequality in East Asia. Washington, D.C.: World Bank.

Anand, Sudhir. 1983. Inequality and Poverty In Malaysia: Measurement and Decomposition. New York: Oxford University Press.

Asian Development Bank (ADB). 2007. Inequality in Asia: Special Chapter in Key Indicators 2007. Manila: Asian Development Bank.

Capulong, Ma. V., Edwards, D., Webb, D. and Zhuang, J. 2000. Corporate Governance and Finance in East Asia: A Study of Indonesia, Republic of Korea, Malaysia, Philippines, and Thailand. Vol. 1. Manila: Asian Development Bank.

Claessens, S., Djankov, S. and Lang, Larry H.P. 1999. Who Controls East Asian Corporations. World Bank Policy Research Working Paper 2054.

Claessens, S., Djankov, S. and Lang, Larry H.P. 2000. The Separation of Ownership and Control in East Asian Corporations. Journal of Financial Economics, 58(1-2): 81-112. Version consulted is November 23, 1999, draft accessed from: http://www1.worldbank.org/finance/assets/images/The_separation.pdf

Davies, James B., Sandström, S., Shorrocks, A. and Wolff, E.N. 2007. Estimating the Level and Distribution of Global Household Wealth. WIDER Research Paper 2007/77.

Department of Statistics, Malaysia. 2003. Sabah and Sarawak: Annual National Product and Expenditure Accounts, 1987-2001.

Fazilah Abdul Samad, M. 2002. Ownership structure in the Malaysian corporate sector: Its impact on corporate governance, performance, financing and investment patterns. Centre on Regulation of Competition Working Paper No. 23, University of Manchester, United Kingdom.

Fazilah Abdul Samad, M. 2003. Bumiputeras in Corporate Malaysia: Three Decades of Performance, 1970-2000. In E.T. Gomez and R. Stephens, eds. The State, Economic Development and Ethnic Co-Existence in Malaysia and New Zealand. Centre for Economic Development and Ethnic Relations (CEDER), University of Malaya, Kuala Lumpur.

Fields, G.S. & Soares, S. 2005. The Microeconomics of Changing Income Distribution in Malaysia. In, Bourguignon, F. et al., eds. The Microeconomics of Incomd Distribution Dynamics in East Asia and Latin America.

Ghani, E. and Suri, V. 1999. Productivity Growth, Capital Accumulation, and the Banking Sector: Some Lessons from Malaysia. World Bank Policy Research Working Paper 2252.

Hanson, James A. 2005. Post-Crisis Challenges and Risks in East Asia and Latin America: Where Do They Go From Here. World Bank Conference on The Financial Sector Post-Crisis: Challenges and Vulnerabilities. April 26-27, 2005, Brookings Institution, Washington, D.C. http://go.worldbank.org/EU9KFCYX20

Hulten, Charles R. and Isaksson, Anders. 2007. Why Development Levels Differ: The Sources of Differential Economic Growth in a Panel of High and Low Income Countries. National Bureau of Economic Research Working Paper 13469, Cambridge, MA.

111

Ishak Shaari. 2000. Economic Growth and Income Inequality in Malaysia, 1971-95. Journal of the Asia Pacific Economy, 5(1&2): 112-124.

Jesudason, J. 1989. Ethnicity and the economy: the state, Chinese business, and multinationals in Malaysia. Singapore: Oxford University Press.

Jomo, K.S. 2004. The New Economic Policy and Interethnic Relations in Malaysia. Identities, Conflict and Cohesion Programme Paper Number 7, UNRISD.

Khoo, Boo Teik. 2008. Apex of Mediocrity: A Reflection on the State of our Public Universities. In, Fong, C.W. & Yin, E.K., eds. Out of the Tempurung.

La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. 1998. Corporate Ownership Around the World. National Bureau of Economic Research Working Paper 6625, Cambridge, MA.

Leete, Richard. 2007. Malaysia from Kampung to Twin Towers: 50 years of economic and social development. Kuala Lumpur: Oxford Fajar

Lim, Mah Hui. 1981. Ownership and Control of the One Hundred Largest Corporations in Malaysia. Kuala Lumpur: Oxford University Press.

Malaysia. 1984. Mid-Term Review, Fourth Malaysia Plan, 1981-85

Malaysia. 1986. Fifth Malaysia Plan, 1986-90.

Malaysia. 1989. Mid-Term Review, Fifth Malaysia Plan, 1986-90

Malaysia. 1991a. Second Outline Perspective Plan, 1991-2000

Malaysia. 1991b. Sixth Malaysia Plan, 1991-1995.

Malaysia. 1993. Mid-Term Review, Sixth Malaysia Plan, 1991-1995

Malaysia. 1996. Seventh Malaysia Plan, 1996-2000.

Malaysia. 1998. Mid-Term Review, Seventh Malaysia Plan, 1996-2000.

Malaysia. 2001a. Third Outline Perspective Plan, 2001-2010

Malaysia. 2001b. Eighth Malaysia Plan, 2001-2005

Malaysia. 2003. Mid-Term Review, Eighth Malaysia Plan, 2001-2005.

Malaysia. 2006. Ninth Malaysia Plan, 2006-2010.

Maznah Mohammed. 2005. Ethnicity and Inequality in Malaysia: A Restrospect and a Rethinking. Centre for Research on Inequality, Human Security and Ethnicity (CRISE), Oxford, Working Paper 9. Accessed 8 May 2007: http://www.crise.ox.ac.uk

Meerman, Jacob. 2008. The Malaysian Success Story, the Public Sector and Inter-ethnic Inequality. In, Joan M. Nelson et al. eds. Globalization and National Autonomy: the Experience of Malaysia.

Milanovic, Branko. 2006. Inequality and Determinants of Earnings in Malaysia, 1984-1997. Asian Economic Journal, 20(2): 191-216.

Nair, Sulochana. 2003. Poverty in Malaysia: Trends and Changing Dimensions. In E.T. Gomez and R. Stephens, eds. The State, Economic Development and Ethnic Co-Existence in Malaysia and New Zealand. Centre for Economic Development and Ethnic Relations (CEDER), University of Malaya, Kuala Lumpur.

Oaxaca, Ronald L. 2007. The challenge of measuring labor market discrimination against women. Swedish Economic Policy Review, 14: 199-231.

112

Ragayah, Hj Mat Zin. 2003. Explaining the Trend in Malaysian Income Distribution. East Asian Development Network (EADN) Regional Project on Income Distribution and Sustainable Development: The East Asian Experience. http://www.eadn.org/eadnrr3.htm

Ragayah, Hj Mat Zin. 2008a. Poverty Eradication, Development, and Policy Space in Malaysia. In, Joan M. Nelson et al., eds. Globalization and National Autonomy: the Experience of Malaysia.

Ragayah, Hj Mat Zin. 2008b. Income Inequality in Malaysia. Asian Economic Policy Review, 3(1): 114-132.

Ravallion, M., Datt, G. and van de Walle, D. 1991. Quantifying Absolute Poverty in the Developing World. Review of Income and Wealth, 37(4): 345-61.

Reddy, Sanjay & Pogge, Thomas. 2003. How not to count the poor. Version 4.5. http://www.undp.org/povertycentre/publications/poverty/HowNOTtocountthepoor-SANJAYREDDY.pdf Also available at: http://www.columbia.edu/~sr793/ A short version forthcoming in, Sudhir Anand, Paul Segal & Joseph Stiglitz, eds., Debates on the Measurement of Poverty

Shireen, Mardziah Hashim. 1998. Income Inequality and Poverty in Malaysia. Lanham, MD: Rowman & Littlefield

Snodgrass, D.R. 1980. Inequality and Economic Development in Malaysia. Kuala Lumpur: Oxford University Press.

Yeoh, Kok Kheng. 2003. State Action, Ethnic Fragmentation and Co-Existence in Malaysia: A Public Policy Perspective. In, E.T. Gomez & R. Stephens, eds. The State, Economic Development and Ethnic Co-existence in Malaysia and New Zealand. Centre for Economic Development and Ethnic Relations (CEDER), University of Malaya, Kuala Lumpur.

World Bank. 1990. World Development Report 1990: Poverty. New York: Oxford University Press.

World Bank. 1995. Malaysia – Meeting Labor Needs: More Workers and Better Skills. World Bank Country Economic Report, Report No. 13163-MY.

Young, Allyn. 1994. Tyranny of numbers: confronting the statistical realities of East Asian growth experience. National Bureau of Economic Research Working Paper 4680, Cambridge, MA.

Yun, Myeong-Su. 2007. Wage Differentials, Discrimination and Inequality: A Cautionary Note on the Juhn, Murphy and Pierce Decomposition Method. Institute for the Study of Labor (IZA), Bonn, Discussion Paper No. 2937, July. http://ssrn.com/abstract=1004499

Zainal Aznam. 2005. Policy Case Study: New Economic Policy, Malaysia. Paper presented at the IADB’s Semana de Desarrollo Social, 24-27 Oct 2005. http://www.iadb.org/sds/semanasocial/Docs/Malaysia.doc

113

Annex I Logistic regression results for Tertiary Certification on

Ethnicity, Age Group and Ethnicity*Age Group Whole Model Test Model -LogLikelihood DF ChiSquare Prob>ChiSq Difference 3595.886 24 7191.772 0.0000 Full 52756.087 Reduced 56351.972 No. of observations: 195194

Parameter Estimates Term Estimate SE ChiSquare Prob

>ChiSq Lower 95%

Upper 95%

Intercept -3.199 0.041 6069.1 0.0000 -3.280 -3.119 [25 - 34] 1.026 0.047 477.29 <.0001 0.934 1.118 [35 - 44] 0.611 0.050 148.83 <.0001 0.513 0.710 [45 - 54] 0.254 0.055 21.11 <.0001 0.146 0.363 [55 - 64] -0.392 0.079 24.36 <.0001 -0.547 -0.236 [Malay] 0.081 0.049 2.73 0.0988 -0.015 0.177 [Other Bumiputera] -1.125 0.108 108.44 <.0001 -1.338 -0.934 [Chinese] 0.319 0.047 46.54 <.0001 0.228 0.411 [Indian] 0.266 0.058 21.04 <.0001 0.153 0.381 [25 - 34]*[Malay] 0.380 0.055 48.15 <.0001 0.273 0.488 [25 - 34]*[Other Bumiputera] 0.168 0.116 2.10 0.1472 -0.058 0.396 [25 - 34]*[Chinese] 0.199 0.054 13.81 0.0002 0.094 0.304 [25 - 34]*[Indian] -0.376 0.069 29.62 <.0001 -0.512 -0.241 [35 - 44]* [Malay] 0.351 0.058 36.62 <.0001 0.237 0.464 [35 - 44]*[Other Bumiputera] 0.120 0.122 0.97 0.3245 -0.118 0.361 [35 - 44]*[Chinese] 0.034 0.057 0.36 0.5472 -0.078 0.146 [35 - 44]*[Indian] -0.204 0.072 7.99 0.0047 -0.346 -0.063 [45 - 54]*[Malay] 0.101 0.064 2.48 0.1151 -0.025 0.226 [45 - 54]*[Other Bumiputera] 0.175 0.135 1.66 0.1982 -0.090 0.442 [45 - 54]*[Chinese] -0.118 0.064 3.45 0.0633 -0.243 0.006 [45 - 54]*[Indian] -0.291 0.085 11.82 0.0006 -0.458 -0.126 [55 - 64]*[Malay] -0.200 0.092 4.69 0.0304 -0.381 -0.019 [55 - 64]*[Other Bumiputera] -0.030 0.194 0.02 0.8768 -0.409 0.351 [55 - 64]*[Chinese] -0.124 0.091 1.88 0.1708 -0.303 0.053 [55 - 64]*Indian] 0.079 0.121 0.42 0.5180 -0.160 0.317 log odds for tertiary/no tertiary, coded as 1 and 0.

114

Effect Likelihood Ratio Tests Source Nparm DF L-R ChiSquare Prob>ChiSq Age Group 4 4 836.174414 <.0001 Ethnicity 4 4 339.285553 <.0001 Age Group*Ethnicity 16 16 140.69494 <.0001

The reference groups are Age Group [65 & above], Ethnicity[Others], and [Age Group]*Ethnicity[Others]. Note that JMP codes the reference groups as -1, thus sum of estimates for a variable is zero. The sample was the individual data from the 2 per cent sample of the 2000 Census, limited to citizens aged 25 and above, as the interest was tertiary education which, in Malaysia, is generally completed by age 25, and the comparisons between Malaysian citizens.

115

CHAPTER 4

Welfare Regime, Social Protection and Poverty Reduction

Saidatulakmal Mohd

This chapter examines various social protection programmes that include social security, social assistance and innovative agricultural programmes with an emphasis on their impacts on poverty. The social security schemes include the Pension scheme, Employees Provident Fund (EPF), Armed Forces Fund (AFF) and Employer’s Liability Scheme. The main social insurance scheme to be discussed is the scheme provided by the Social Security Organisation (SOCSO). The social assistance programmes are mostly those provided by the Department of Social Welfare (in the Ministry of Women, Planning and Community Development). Detailed discussions of the social assistance programmes are linked to the design of Malaysia’s welfare regime as well as its evolution to eradicate poverty. The discussions of the social security schemes focus on the adequacy of retirement benefits. The chapter also contains a section on reforms and structural changes of the social protection programmes to tackle the issues of poverty associated with inadequate income. I. The design of Malaysia’s welfare regime

Esping-Andersen (1990), as cited in Gough (2000), defines a welfare regime as ways of conceptualising the welfare programmes, outcomes and effects of those capitalist societies that had been transformed into welfare states. In general, a welfare regime encompasses, among others:

a. the pattern of state social policies and programmes, usually distinguishing between social assistance, social insurances and universal citizenship modes of distributing benefits in cash and in kind; and

b. the wider pattern of welfare provisioning in society, usually in terms of the division of responsibility between the state, the market and the household.

The term ‘welfare’ in the Asian context frequently denotes ‘state hand-outs’ or

charity (Gough 2000) and hence the term is often misunderstood. The term ‘welfare regime’ in Asia, and Malaysia, particularly, can best be defined as a social policy regime. Social policy, as the name implies, includes policies on health, education, training, housing, unemployment and poverty reduction that aim to improve the welfare or well-being of people and particular groups such as women, youth, children, the elderly and the disabled. However, given their overlapping similarities in explanation and intent, the terms welfare regime and social policy regime may be used interchangeably. For the purpose of this Chapter, welfare regime is used to represent social policy in Malaysia. As pointed out by Esping-Andersen (1999), the welfare regime approach is precisely concerned with the broader ‘welfare mix’ and the interactions of public sector, private sector and households in producing livelihoods and distributing welfare.

116

Figure 1 Malaysia Development Expenditure 1970–2006

0.00

20.00

40.00

60.00

80.00

100.00

120.00

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

Years

Perc

enta

ge

Economic services Social services Security General administration

Source: Accountant General Department as cited in Central Bank of Malaysia (2006)

Like Japan and the East Asian newly industrialised economies (NIEs) of South Korea, Taiwan, Hong Kong and Singapore, which spent relatively little on social benefits while pursuing their economic strategies (Gough 2000), Malaysia has concentrated on proving high expenditures for economic growth. As Figure 1 shows, Malaysian development expenditure on economic services has generally exceeded 50 per cent of total development expenditures. In Malaysia, however, social service expenditures form the second largest portion of development expenditure and have been on the rise except for declines during the 1985 recession and the 1997 financial crisis. Post-financial crisis expenditure shows a steady decline in the proportion of economic service expenditure but an increase in social services expenditure.

Within the public sector, social services expenditure has given priority to education and planning, health and family planning, housing, and social and community services, with very little attention given to social protections (Figure 2). Prior to the 1980s, social and community services received the least attention in development planning. During the 1980s more attention was given to property development and the expenditure associated with housing was among the highest in the social services expenditure. However, with gradual recognition of their importance, social and community services have assumed the second largest share of social services expenditure after education and planning.

117

Figure 2 Social Services Expenditure 1970–2006

0.00

20.00

40.00

60.00

80.00

100.00

120.00

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Year

Perc

enta

ge

Education and planning Health and family planning Housing Social and community services

Source: Accountant General Department as cited in Central Bank of Malaysia (2006)

The low public responsibility for public welfare expenditure is due to a customary reliance on family support. Family support, a socio-cultural norm, remains an ideologically element of the traditional welfare system in contemporary Malaysia. Jones (1993) alludes to family support in Asia as being a part of an ‘Oriental Culture’ or ‘Confucian Welfare State’ in which societies are portrayed as consisting of coherent families with strong mutual support between family members, and a harmonious society is assumed to be built on cooperation between different ethnic groups, races, genders, and classes.

However, Chan (2006) argues that family structure and family relationship are changing entities rather than static ones. Economic growth, industrialisation, urbanisation, and modernisation have caused major changes to family relationships and concepts. While the parents may have been more tied to nature and agriculture, globalisation, modernisation and industrialisation have occasioned a paradigm shift among the young, leading many of them to move away from the traditional economic activities. As a consequence, this has caused a large influx of rural population into the city (or as part of emigration to developed countries) in search of better standards of living and higher incomes. Indeed, the population and housing censuses of 1991 and 2000 (Department of Statistics) showed that rural-urban migration had increased slightly from 17.1 per cent in 1991 to 17.6 per cent in 2000 while migration between cities showed an increase from 50.1 per cent in 1991 to 63.2 per cent in 2000. It is estimated that three quarter of the population would live in urban areas in 2020.

Moreover, the extended family has been steadily replaced by the nuclear family while individualism has affected an older attachment to the family. Attitudes towards

118

the family have changed, too, with more women pursuing higher education, opting for later marriage, preferring to have fewer children. For that matter, there has been an increase in the divorce rate. At the same time, a declining birth rate has led to a higher dependency ratio and the problems of an ageing society, while the increasing divorce rate is associated with other social issues, such as the burdens of single parenthood, single motherhood, and even juvenile delinquency. With such social changes, more formalised and rigorous welfare programmes are needed to protect certain groups in the society from the inadequacy of family support, something that was not previously thought to be likely.

The public welfare programme is the responsibility of the Department of Social Welfare under the Ministry of Women, Family and Community Development. In the area of community social welfare, the Department focuses on social development but it also maintains various community programmes to aid certain target groups. Among the target groups are children, foster children, the elderly, and the disabled, while the programmes include general assistance, special grants, natural disaster relief and the provision of artificial body parts. General assistance programmes include aid for widows and dependents, school assistance (except text books), the dependents of prisoners, and unemployment benefits. The Department of Social Welfare provides assistance in the forms of lump-sum monetary grants, subsidy-in-kind such as clothing and food parcels, apprenticeship training, and small business launching grants. This scheme is strictly means-tested, and low income is the principal determinant of eligibility (Ragayah 2005).

From Figure 3, it can be seen that there was the number of welfare programme beneficiaries rose from 1997 to 2001 before falling in 2003. The amount of the social assistance expenditure also rose up to 1997 and thereafter experienced a large increase to 2001 before the decline in 2003. Although the absolute amount of expenditure was huge, it was extremely low as a proportion of GDP (Figure 4). The latter figure did not exceed one per cent for the period, partly because of the strong focus on economic expenditure (as was previously indicated by Figure 1).

Monthly allowance social assistance payments are given at a rate of RM80 per person, subject to a maximum of RM350 per family. Old folks above the age of 60 years who are destitute and do not have any relatives to depend on for support are eligible to apply for assistance of up to RM200 a month. The award of these benefits has tended to be biased in favour of applicants in urban areas; eligible rural dwellers are often excluded because of ignorance of the programme, or through administrative procedures as applications are received and processed in the large urban centres (Ragayah 2005). The elderly form the single largest group receiving social assistance (Figure 5) from the public welfare programme in line with the high proportion of social assistance expenditure that is devoted to the elderly (Figure 6), an indication of changed family relationships and circumstances. Realising this, and to raise the level of protection for the elderly, the Department of Social Welfare had in 1990 established a National Policy for the Elderly in 1990 that would in principle “ensure the social status, dignity and well being of older persons as members of the family, society and nation by enabling them to optimise their self-potential, have access to all opportunities and have provision for care and protection” (Department of Social Welfare, undated: 12).

119

Figure 3 Social Assistance Expenditures and Beneficiaries 1991–2003

010,00020,00030,00040,00050,00060,00070,00080,00090,000

1991 1992 1993 1994 1996 1997 2001 2003

Years

Num

ber

of B

enef

icia

ries

010,000,00020,000,00030,000,00040,000,00050,000,00060,000,00070,000,00080,000,00090,000,000

RM

(Mill

ion)

Number of Beneficiaries Expenditures

Source: Department of Social Welfare

Figure 4 Social Assistance Expenditure as a Percentage of GDP 1991–2003

0.014%0.019%

0.025%

0.013%0.013%

0.012%

0.015%0.016%

010,000,00020,000,00030,000,00040,000,00050,000,00060,000,00070,000,00080,000,00090,000,000

1991 1992 1993 1994 1996 1997 2001 2003

Years

RM

(MIli

on)

0.000

0.005

0.010

0.015

0.020

0.025

0.030

Perc

enta

ge

Expenditures Expenditure as a percentage to GDP

This national policy is the first ever public sector effort that specifically recognised the need to care for older persons even as families and communities are encouraged or expected to continue to provide care to the elderly (Ong 2002). Prior to this, policy on care for the elderly was largely incorporated in the overall development of the social welfare policy. Social assistance to the elderly includes monetary grants, food, clothing, and shelter.

The increase of social assistance expenditures to the elderly is related to the growing incidence and reports of children abandoning their parents. The government has made considerable effort to strengthen family relationships to enhance the traditional family support as the prime source of welfare protection in the community; “instead of asking the government to spend more money to build nursing home,’ it has been urged, “it would better if we get the children to care for their elderly parents” (Badrudin Amiruldin, cited in Tan 2007:16)

120

In terms of caring for the elderly, the Department of Social Welfare wants

institutional support to be the support of last resort. Currently, instead of having only the government take care of the elderly, non-governmental organizations (NGOs) also play a role. For example, old folks’ homes and elderly day care centres are being run by both the government and some NGOs. Moreover, NGOs are involved in the National Elderly Council to design and plan programmes to enhance the well-being of the elderly. The participation of local community is also encouraged to ensure that the elderly remain in their community which the Department of Social Welfare prefers to placing them in an institution. Hence, the Department of Social Welfare and some NGOs try to find voluntary ‘carers’ or ‘non-live-in families’ to take care of the elderly within their community, to assist them in such routines as the procurement of groceries, cleaning, and meal preparation.

Figure 5 Number of Social Assistance Beneficiaries (by Programmes) 1991–2003

010,00020,00030,00040,00050,00060,00070,00080,00090,000

1991 1992 1993 1994 1996 1997 2001 2003

Years

No. o

f Ben

efic

iari

es

Widows and dependent Elderly Unemployment benefits Disabled

Source: Department of Social Welfare

There is no comprehensive unemployment insurance or assistance to help the unemployed in Malaysia. Unemployment benefits are meant for workers who are destitute and, as shown in Figures 5 and 6, the number of such beneficiaries and the level of corresponding expenditure are the second lowest in the four major social assistance programmes. The welfare regime does not cover unemployment partly because continuous economic growth has led to low unemployment rates. The unemployment rate ranged from 2.4 per cent in 1995 to 3 per cent in 2000.

121

Figure 6

Expenditure on Major Social Assistance Programmes 1991–2003

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

1991 1992 1993 1994 1996 1997 2001 2002 2003

Years

RM

Widows and Dependents Eldely Unemployment Benefits Disabled

Source: Department of Social Welfare

Figure 7 Employment, Unemployment and Labour Market Participation 1992–

2004

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

199219931995199619971998199920002001200220032004

Years

0.050.0

100.0150.0

200.0250.0

300.0350.0

400.0

Labour force Employment Unemployment

Source: Department of Statistics Moreover, Malaysia has been able to achieve full employment since the 1980s (Figure 7). Thus, it could also be concluded that unemployment is not the primary cause of

122

poverty in Malaysia as has been the case in most developing countries. Moreover, the reduction of poverty in Malaysia, from 49.3 per cent in 1970 to 22.8 per cent in 1990 and 5.7 per cent in 2004, was realised without increasing employment but it was rather associated with high output (Figure 8). Malaysia could be seen as an economy with moderate labour-absorbing capacity because the ratio of output to employment has risen quite steadily (Figure 8). This means that it requires a larger increase in output to generate a rise in employment.

Figure 8 Output, Employment and Aggregate Labour Productivity

(Output: Employment) 1992–2004

0.0

50,000.0

100,000.0

150,000.0

200,000.0

250,000.0

300,000.0

1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040

5

10

15

20

25

30

Employment Real GDP (1987=100) Output:Employment

Source: Department of Statistics

In addition to the public welfare programme, there is a social assistance programme that is exclusively meant for Muslims. This programme takes the form of zakat (tithe) that is managed by an Islamic institution, the Baitulmal. The zakat collections are distributed among the destitute, poor, zakat collectors, new converts and travellers, and for payment of debts, freeing of slaves, and upholding of the religion. However, the zakat contributions are relatively low, approximately RM 408 million in 2003. Hence, the Muslims could not depend on the zakat collection for development (http://www.zakat.com.my). Each of the 14 states of the country, and the Federal Territories administers, regulates and distributes zakat. Although they are operated openly and are based on a formal structure, the methods of allocating assistance are rather informal, that is, based on the deliberation of zakat councils subject to Quranic guidelines, and not strict and consistent economic criteria (Ragayah 2003).

II. Evolution of welfare regime (Towards poverty eradication) Two features of social policy that distinguish Malaysia from other countries are:

a. a lengthy and continuous period of stability combined with a supportive environment. This has ensured an orderly and incremental development of social policies. Few developing countries have had the benefit of such an environment;

123

b. a succession of strong governments and a public sector committed to improve the welfare and well-being of all Malaysians (United Nations 2003:7).

The evolution of the social policy/welfare regime and its significance for poverty eradication in the 50-year span from 1957 to the present may be analysed according to four different phases, namely, 1957–1980, the Mahathirist regime of 1981–1997, financial crisis period of 1998–2002, and the post-2003 regime under Prime Minister Abdullah Hj. Ahmad Badawi. A summary of the evolution is shown in Table 1.

Table 1 Evolution of welfare regime since 1957

The political economy of Asian societies, including that of Malaysia, follows the ‘productivist’ welfare model that helps to cultivate work ethic, promote workfare, maintain a pool of hard working and flexible labour, uphold laissez-faire capitalism, and construct a highly competitive economy (Holiday 2000). The ‘productivist’ welfare model is often associated with production or economic driven welfare (social) policies.

Initially, similar to some East Asian countries, Malaysia adopted social policies in the narrow sense of the term (Chang 2004) – that is ‘welfare-state’-style policies such as public health care, free education, unemployment benefits, state pensions and income support. Hence, during the first phase (1957-1980) of the welfare regime, government played an important role in restructuring the society by providing funds for social services programmes especially education, health, basic social protections as well as welfare assistance programme for the poor and underprivileged groups. During this time, Malaysia already had a mixed financing scheme of the social protection and welfare programmes, of state financing and a contributory old-age provident fund. The social protection programmes were the government pension scheme, Employees Provident Fund, Social Security Organisation (SOCSO), Workmen’s Compensation Scheme, and the Armed Forces Fund.

The social welfare or welfare assistance programme established during this phase was placed under the jurisdiction of the Ministry of Health and Social Welfare with limited participation of NGOs. Since its inception, the Department of Social Welfare’s duty was focused on tackling the social issues arising out of World War II. The SOCSO and Workmen’s Compensation Scheme would protect workers and their dependents from temporary or permanent unemployment resulting from injury or accidents at work whereas the defined benefit pension scheme and defined contributory

Rigorous social policies

1981-19971957-1980 1998-2002 2003-present

Narrow ‘welfare-state’ style policies

NEP (1970) Broader ‘welfare-state’ style policies

- Public health programs - Free education - Unemployment benefit - State pension / EPF - Income support

- Land reforms - FELDA, FELCRA, IADP - Poverty eradication (rural)

- Combat poverty- Target Hardcore poor

NGOs Involvement

- Microcredit - AIM

Private Involvement

- Privatisation - Moderate government expenditure

Financial Crisis After Effect ‘National Social Welfare Policy’

- Ministry of Women, Family and Community Development

- Effect on the poor - Inadequate

Agriculture Productivity

- Further strengthening - Agropolitan Zero-poverty target

124

provident fund protected the financial well-being of the people during retirement. There was no social policy that focused on the social welfare development of the community. Social policies and poverty eradication had always been integrated with national development policies and embedded in the Malaysian plans beginning with the Second Malaya Plan to the Ninth Malaysia Plan

The ethnic violence of 1969 led to the introduction of the New Economic Policy (NEP) in 1970 that embarked the government on its poverty eradication programme and its plan to correct the economic imbalances among the ethnic groups (see Chapter 1). The NEP broadened the ‘welfare-state’-style policies to include all policies (and institutions) of land reforms, agricultural and rural development, some protection of labour, public housing and inter-ethnic income redistribution to address ‘social problems’ such as poverty, income inequality, workers’ rights, and human rights (Chang 2004).

This policy gave considerable attention to the people in the rural areas to ensure that they received equitable opportunities during the development of the nation. While this group of people did not benefit from the existing social protection schemes, they were provided with the means and alternatives of upgrading their lives and moving their productive activities up the value chain in parallel with economic development and the modernization of agriculture. Among the causes of the high incidence of rural poverty in the 1970s were small-sized land holdings, lack of extension services and the limited incomes of tenant farmers. Land reform at this stage included new land development schemes such as the Federal Land Development Authority (FELDA) schemes to provide landless farmers with land. To assist poor landowners and rubber and oil palm smallholders, the government implemented in-situ development programmes such as the Integrated Agriculture Development Programmes (IADP) and replanting schemes under Federal Land Consolidation and Rehabilitation Authority (FELCRA).

The second phase (1981-1997) of the welfare regime showed continuity of government effort in implementing social policies, a larger role for the private sector and, to a lesser extent, the involvement of NGO (United Nations 2003). Social policy during this era was more rigorous in the fight against poverty involving the government as well as the NGOs. The thrust of government poverty eradication programme during this phase was the Programme for the Eradication of Hardcore Poor (Program Pembasmian Rakyat Termiskin, PPRT), targetting the hardcore (extreme) poor in a more co-ordinated and comprehensive manner. Among the programmes implemented were the Housing Rehabilitation Programme (Rancangan Pemulihan Rumah), to assist in the repair of existing houses or even to build new ones, the Resettlement of Traditional Villages Programme (Rancangan Penempatan Semula Kampung Tradisi) to resettle the poor in new locations with improved social amenities, and the Village Economy Improvement Programme (Peningkatan Ekonomi Kampung) meant to encourage income generating activities that included the production and sale of food items and handicrafts. A total of RM1.1 billion was allocated for the PPRT programmes. A study conducted by Universiti Kebangsaan Malaysia in 1999 found that the income derived from the PPRT programmes, along with some transfer payments from family members had contributed significantly to the increase of the household incomes of the hardcore poor.

Some NGOs were involved in the poverty eradication programmes, such as the Amanah Ikhtiar Malaysia (AIM), a micro credit programme which served as a channel to tackle the issues of poverty. More than 90 per cent of AIM’s borrowers were females.

125

In addition to the micro-credit scheme, many states established their own Poverty Eradication Foundations (Yayasan Basmi Kemiskinan) that received assistance for programme implementation from public and private agencies.

In line with the poverty eradication programmes, the government’s attention was focused on national economic development with increasing private and foreign investment, and privatisation. The private sector was involved in the development of social policy through the process of privatisation to encourage more investment in the economy. The world recession of 1981–1982 caused the government to cut public sector expenditure and privatisation was seen as an alternative to the high government budget deficit at that time. The private sector’s involvement, however, was more viable in social services, especially in the health sector. Social assistance programmes were still largely the responsibility of the government. Nevertheless, the economic restructuring through privatisation has helped the government to maintain a moderate level of expenditure and continue providing for the social policy programmes.

The third phase (1998–2002) of the welfare regime was influenced by the 1997 financial crisis. The financial crisis had forced the government to take swift measures to counter balance the devaluation of the currency, and the subsequent recession and its repercussions for poor and other affected social groups while maintaining the delivery of welfare assistance and various social services (United Nations 2003). According to Ragayah (2002) the coping mechanisms of the low income families during the financial crisis included adjustments to their employment, income, expenditure, and asset ownership. Increased retrenchment and unemployment during this phase forced the government to arrange employment programmes under the Training Schemes for Retrenched Workers Programme offered by the Human Resources Development Council. The inadequacies of existing social protection measures were exposed during the 1997–1998 crisis. For instance, retrenchment benefits were inadequate, urban poverty levels rose, and there was a lack of insurance for both domestic and foreign workers (Ragayah 2005).

The fourth phase (2003–present) of the welfare regime saw a more rigorous effort by the Department of Social Welfare to enhance the wellbeing of the elderly, unfortunate and the disabled through various programmes and forms of social assistance. This phase aimed at strengthening agricultural productivity with sustained efforts to fight poverty and promote agriculture as the second engine of economic growth. Agriculture was given a greater emphasis as rural poverty remained higher than urban poverty although the incidence of rural poverty had declined from 26 per cent in 1999 to 21.1 per cent in 2004, and hardcore rural poverty from 5.3 per cent in 1999 to 4.1 per cent in 2004. Poverty eradication programmes were continued with a ‘zero poverty target’ for hardcore poverty and the reduction of the proportion of the families living under the poverty line to 2.8 per cent. In addition, efforts were made by the renamed Ministry of Agriculture and Agro Based Industry to change “the way the traditional economic activity has operated” so as to achieve its holistic transformation into a modern and dynamic farming sector that will generate value-added income from both production and downstream processing.”

During this phase, the National Social Welfare Policy, for which the Ministry of Women, Family and Community Development was responsible, was promulgated (on 19th February 2003) with the objective of ensuring that each individual, family and community regardless of race, religion, gender, political belief and county received and provided contributions to the nation’s development and enjoyed a comfortable standard

126

of living. The National Social Welfare Policy seeks, among other goals, to strengthen and develop a social support system and social services.

From Table 2, it may be inferred that Malaysia was able to reduce the overall poverty rate from 8.5 per cent in 1999 to 5.7 per cent in 2004, and a slight reduction of hardcore poor from 1.9 per cent to 1.2 per cent for the same period. The improvement in the poverty rates was experienced by all ethnic groups, particularly the Bumiputeras. The hardcore poor of the Bumiputeras declined one percentage point while the overall poverty rate was reduced by four percentage points between 1999 and 2004. The poverty rate of the Chinese was the least among the three major ethnic groups where the overall poverty rate was only 0.6% and hardcore poverty was only 0.1% in 2004.

Table 2 Poverty Rates 1999 and 2004

1999 2004 Malaysia Bumiputera Chinese Indian Malaysia Bumiputera Chinese Indian

Hardcore Poor 1.9 2.9 0.2 0.3 1.2 1.9 0.1 0.3 Urban 0.5 0.7 0.1 0.2 0.4 0.7 <0.05 0.2 Rural 3.6 4.4 0.4 0.5 2.9 3.3 0.3 0.5 Overall Poverty 8.5 12.4 1.2 3.5 5.7 8.3 0.6 2.9 Urban 3.3 5.1 0.8 2.4 2.5 4.1 0.4 2.4 Rural 14.8 17.5 2.7 5.8 11.9 13.4 2.3 5.4 Poverty Gap 3.3 0.2 0.7 2.1 0.1 0.6

Source: Economic Planning Unit and Household Income Surveys 1999 and 2004 (Ninth Malaysia Plan).

III. Social Protection Systems Two social protection systems to be discussed are the social security schemes and social insurance. a. Social Security Schemes The four social security schemes to be discussed are the Pension scheme, EPF, Armed Forces Fund (LTAT) and Employer’s Liability Scheme. The discussion centres on issues of the adequacy of benefits, particularly retirement benefits, but also pays attention to issues of coverage, the nature of schemes, investment policies and performance, labour force participation rate of the elderly, and house acquisition. Pension Scheme

The Malaysian pension scheme is a non-contributory benefit retirement scheme specially designed by the government to reward civil servants96 for their loyalty and hard work. There is no record to indicate exactly when the scheme was introduced. The relevant committee of the pre-independence Federal Legislative Council surmised that

96 Civil servants include the military and police force, judiciary and legal service, the federal and state administration service and the railway and the education service.

127

the scheme was established only after 1875 for there is no prior record of its existence (Wahid 1970, cited in Yaacob 2000). The first consolidated pensions law came about in 1928 for the Federated Malay States and it became an ordinance in 1951 (Sujata 2007). While this was a non-contributory fund for public sector employees, the employer (the government) allocated a minimum of 17.5 per cent of a civil servant’s salary into a pension trust fund (KWAP) every month. The pension is a retirement income protection granted to the public servant or his/her dependent(s) upon retirement, disease(s) that prevented an employee from working, or death. Act 227 of the Federal Constitution declares that the pension is the responsibility of the federal government. Benefits include those relevant to employment injury, disability, superannuation, or gratuity payments made upon retirement, and dependents’ pension in the event of an employee’s death while in service and death after retirement.

On retirement, a public sector employee is entitled to pension benefits, gratuity and ‘golden handshake’97 payment (if applicable). The pension benefits and gratuity would be paid one month after retirement whereas the ‘golden hand-shake’ would be paid on the last day of work. The gratuity is paid as a lump sum, whereas the pension benefits are paid monthly for the rest of the employee’s life span. The pension and grant rates are dependent upon the length of service and the last drawn salary received by the employee. Civil servants are entitled to a 50 per cent replacement rate if the length of service is more than 25 years. If the length of service is less than 25 years, the pension entitlement is based on the following formula: 1/600 x length of service taken into account x final monthly salary received. A different calculation of minimum pension benefits applies to an employee who retires because of health reasons, appointment in society or organisation or death. The minimum pension benefit is one fifth of the final salary if the length of service was less than 10 years. Pensioners are also entitled to free medical treatment in government clinics and hospitals.

Employees Provident Fund (EPF)

The EPF is a compulsory savings scheme designed to cater to the retirement needs of private sector employees. Established on 1 October 1951, the EPF was the world’s first national employees’ provident fund. The Fund is financed by members’ and employers’ monthly contributions with their contribution rates shown in Table 3. After the age of 55, a member can continue to contribute to the fund provided that he or she is still working. At present, there are approximately 601,000 EPF members above 55 years; they have total accumulated savings of RM10.4 billion. Contributions to the Fund would be terminated should a member wish to withdraw savings from the Fund for a second time after the first withdrawal which can be made at the age of 55. To date, working individuals above 55 years must continue to contribute to the EPF until the age of 75 years old. However, the contribution rates for these workers are lower, that is 5.5 per cent for the employee and 6 per cent for the employer compared to the normal rates of 11 per cent and 12 per cent respectively.

97 Under the ‘golden hand-shake’ facility, public servants may accumulate up to a maximum of 90 days of their annual leave in exchange for cash payment at the end of their service; the amount is calculated based on the last drawn salary, inclusive of all allowances, and the accumulated leave, being leave not taken on grounds of exigencies of service.

128

Table 3 EPF Contribution Rates 1952–2005

Years Employee (%) Employer (%) Total (%) 1952 - Jun 1975 5 5 10 Jul 1975 - Nov 1980 6 7 13 Dec 1980 - Dec 1992 9 11 20 Jan 1993 - Dec 1995 10 12 22 Jan 1996 - Mar 2001 11 12 23 Apr 2001 - Mar 2002 9 12 21 Apr 2002 – May 2003 11 12 23 Jun 2003 - May 2004 9 12 21 Jun 2004 to present 11 12 23

Source: http://www.kwsp.gov.my

Originally the EPF was meant to meet the retirement financial requirements of its members. Beginning in 1968, the EPF introduced its first partial withdrawal scheme that allowed its members to withdraw up to one third of their accumulated savings. Since then, the EPF has undergone various structural changes, especially with regard to pre-retirement withdrawal arrangements. At present, the EPF is divided into two main accounts: 70 per cent of members’ contributions are credited to Account I for retirement purposes, and the remaining 30 per cent of their contributions are deposited in Account II that may be used for pre-retirement purposes such as withdrawals for purchasing houses and financing pre-retirement expenses. For 2006, for example, the EPF had approved 139,818 applications for the withdrawal of accumulated savings valued at RM 5.38 billion (EPF Annual Report 2006, cited by Nizam Yatim 2007b). The withdrawals for retirement increased 11.39 per cent compared to RM4.38 billion in 2005. The withdrawals of EPF savings for other pre-retirement purposes, such as investment, education and health, were valued at RM12.15 billion, that is, 4.71 per cent less than the RM12.75 billion of 2005.

Figure 9 shows EPF contributions and withdrawals in recent years. The amounts and withdrawals of contributions had increased over time. The increasing number of EPF withdrawals is a major concern as this could lead to the inadequacy of funds to finance retirement expenses. In 2001, for example, EPF withdrawals exceeded the value of contributions.

Figure 9 EPF Contributions and Withdrawals

05000

100001500020000250003000035000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Years

RM

(M

illio

n)

Contributions Withdrawals

Source: Employee Provident Fund

129

Moreover, as Figure 10 shows, EPF contributions and withdrawals as a percentage of GDP has been declining. Net EPF contributions as a percentage of GDP recorded its highest level of 3.94 per cent in 1999 but a negative contribution of 0.65% in 2001.

Figure 10 EPF Contributions and Withdrawals as a Percentage to GDP

-2-1012345678

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Pe

rce

nta

ge

s

Net EPF contributions Contributions Withdrawals

The EPF has demonstrated a good performance even though provident funds

tended to pay interest rates that are below the inflation rate (Williamson and Pampel 1998) prior to the financial crisis of 1997. While the EPF claims that its fund is ‘too big’ and there are limited opportunities to invest, its pre-crisis shift from MGS and investment in the equity market are contributory factors to the falling returns (Table 4). Another reason for the decline in returns of investment income is that EPF investment has been channelled to finance government projects or to bail out inefficient government development projects during the financial crisis.

Table 4 Rates of Return 1970–2004

Years 1970 1985 1990 1995 1999 2000 2001 2002 2003 2004 Dividend (%) 5.75 8.50 8.00 7.50 6.84 6.00 5.00 4.25 4.50 4.75 Inflation rate (%) 1.60 0.3 3.10 3.40 2.80 1.60 1.40 1.80 1.20 1.40 Real dividend (%) 4.20 8.20 4.90 4.10 4.04 4.40 3.60 2.45 3.30 3.35

Source: http://www.kwsp.gov.my and EPF annual report

Indeed Bloomberg reported (The Star, 19 March 2006) that EPF’s return fell in the first quarter of 2006 even though the available investment was large (37 per cent in MGS, 36 per cent in bonds and loans, 19 per cent in stocks, 7.54 per cent in equity markets, and 0.6 per cent in the property market). In the same report, the CEO of EPF, Azlan Zainol (cited in Bloomberg 2006:B3) mentioned that EPF was searching for investment opportunities that could provide a high return ‘whenever there is a chance’ in addition to maintaining investment activities that ensured a low risk to the contributors’ savings. The EPF needs to find better investment alternatives soon to ensure higher returns. The fluctuations in the EPF’s rates of returns at the current stage (Table 4) give cause for concern. In the third quarter of 2006, the EPF’s return to investment showed an increase which should lead to a higher return to contributors’

130

accumulated savings. The EPF’s gross investment income increased by 1.2 per cent enabling EPF to declare a rate of return of 5.15 per cent, an increase from 4.75 per cent in 2004. Armed Forces Fund (Lembaga Tabung Angkatan Tentera, or LTAT)

Since 1973, the Armed Forces Fund, LTAT, has made it compulsory for members of ‘other ranks’98 in the armed forces to become LTAT members. Similar to the EPF, LTAT is funded by contributions from employees and employer (in this case, the the government. The current member’s contribution rate to the fund is 10 per cent of the monthly salary, with an additional 15 per cent contribution from the government. For military officers, this scheme acts as a savings scheme that permits them to contribute voluntarily to the fund. The contribution starts from a minimum of RM25 up to a maximum of RM500 (subject to contributions being in multiples of five ringgit). Previously the maximum amount was RM200. Voluntary members will not receive any additional contribution from the government. An added advantage of being a member whether compulsorily or voluntarily is that members enjoy the disablement benefit scheme and their dependents gain from the death scheme.

A member can only withdraw the entire savings from the fund at the age of 50; no option is given for monthly payments to be made during retirement. The payments are divided into two different categories. Members who receive a pension from the government will only receive the employee’s contribution upon retirement whereas a non-pensionable99 member will receive the employee’s contribution, the government’s contribution, and other accumulated benefits. Payments, however, are subject to deductions to repay any government loans before retirement. A non-pensionable member can also withdraw the entire savings from the fund one month after discharge from the military. A voluntary member, however, does not face any restriction on withdrawal of money from the fund but his/her LTAT membership is terminated once the savings are withdrawn.

LTAT also permits a member to withdraw money to purchase a low-cost house, a ‘once in a lifetime’ option, the maximum amount being 40 per cent of the balance in the account or RM100,000, whichever is lower. Employer’s Liability Scheme

The employer’s liability scheme covers two main types of benefits – employment injury compensation provided under the Workmen’s Compensation Act 1952, and the sickness and maternity benefits provided under the Employment Act 1955. The paid sick leave entitlement stipulated by the Employment Act 1955 depends on the employee’s length of service and ranges from 14 days for those employed for less than two years, 18 days for those employed between 2 and 5 years, and 22 days if the employee has served the employer for more than 5 years. Employees who are covered by SOCSO are excluded from this scheme.

Under the Workmen’s Compensation Scheme (conceived from the Workmen’s Compensation Act 1952), an injured or deceased worker is compensated by the 98‘Other ranks’ covers all military personnel below commissioned officers, including Warrant Officers, Non-Commissioned Officers, and Privates. 99 Non-pensionable members are those who have been discharged from the army.

131

employer who is required to insure his company against such liabilities. Unlike SOCSO, this scheme operates as a law that governs the terms and amounts of compensation in the case of death or accident. The scheme does not handle the funds but the employer is fully responsible for the social insurance obtained from private companies. Discussions

Pension only covers 1.24 per cent of the total population. In 2001, it was estimated that approximately 30 per cent of the working population was not covered by any formal retirement or social security scheme (Table 5). It was also estimated that EPF actively covers only 52 per cent of the Malaysian labour force (Ramesh, 2005). Hence, approximately 47 per cent of the labour force – the self-employed and those engaged in the agricultural and the informal sectors – is not covered by any formal retirement scheme.

Table 5 Malaysian Retirement Income Coverage 2001

Number % of Total Population

Total working population 9,573,000 100EPF members1 9,900,000 104.36Employees under government pension scheme 118,854 1.24Registered foreign workers 732,588 7.65Estimated foreign workers who are not registered 500,000 5.22Estimated working population not covered by any formal retirement scheme

2,877,300 30.06

1 Exceeds 100% since retired workers can still be members. Source: Ragayah (2003)

Such workers face a serious risk of poverty in retirement unless they have recourse to their own considerable savings and assets, traditional family support, or other job opportunities. Hence, for the lower income groups and individuals who have no alternative sources of income, the present pension system acts as a safety net that at least meets their minimum daily retirement expenses. These groups or individuals who constitute more than half of all civil servants can be assured of basic monthly retirement incomes. Higher income groups show less dependence on the pension scheme for various reasons. In some cases, their services are still needed and they are re-employed on contracts. Moreover, they are more likely to possess other means of income to augment their retirement income. Those who are not protected by any formal retirement schemes often depend on traditional family support.

The concept of balas-jasa (Yaacob 2000:72), which means “repaying parents” for what they have done, has been a continuing basis of intergenerational transfers, an important source of old age income (Caraher 2003). A report from the Second Malaysian Family Life Survey (Haaga et. al. 1993), cited in Caraher 2003), indicated that more than two-thirds of Malaysians aged over 60 co-reside with an adult child. Furthermore, people then expected that those working in the cities would have ample money, enough to send some to their families in the villages. The

132

elderly form a group of the population that is susceptible to poverty. Indeed, research conducted by the Economic Planning Unit, Prime Minister’s Department, has indicated that the incidence of poverty was relatively high among the elderly (Table 6). The poverty rate for the group of people aged 50 years and above was 36.7 per cent in 1999 and 34.2 per cent in 2004. While the percentage has decreased, the numbers are still alarming.

Table 6 Incidence of Poverty by Age Group (%)

Age Group 1999 2004 <20 1.0 0.3 20 - 29 3.8 5.0 30 - 39 24.8 23.7 40 - 49 33.7 36.8 50 - 59 19.3 20.6 >60 17.4 13.6 Total 100.0 100.0

Source: Economic Planning Unit (EPU)

Although civil servants are guaranteed monthly pension payments, they, too, are prone to poverty. Nevertheless, the government’s efforts to improve the standards of living by increasing the salary of civil servants and retirees – between 7.5 and 35 per cent – have benefited a lot of people and kept them out of poverty. In an interview, the President of CUEPACS (the union of civil service employees) mentioned that prior to the rise in salary of the civil servants more than 400,000 pensioners were estimated to be living in poverty. With the salary increase, it was expected that only 2 per cent of pensioners would still be living in poverty. The government’s expenditures on pensions and gratuities have increased each year (Figure 11). The increase of salary in 2007 led to an increase of pensions and gratuities expenditure by approximately RM1 billion, to RM6.7 billion in 2007 compared to RM5.9 billion in 2006 and RM5.7 billion in 2005 (Nizam Yatim 2007e). Pension payments as a percentage to GDP are extremely small, averaging 1.2 per cent (Figure 12). Pension payments are almost negligible compared to the government’s operating expenditure (Figure 12) of 2–8 per cent. Even so, since pensions are paid from the operating expenditure, the escalating pension payments are regarded as a burden on the government. Consequently, the government is planning to change the defined benefit pension system to an alternative system, perhaps resembling the defined contribution of the EPF scheme.

133

Figure 11 Pension Payments (RM million)

0

1000

2000

3000

4000

5000

6000

7000

8000

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

2006

Years

RM

Source: Central Bank of Malaysia; own calculation

Figure 12 Pension Payment as a Percentage of GDP and

Government Operating Expenses

0123456789

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Pe

rce

nta

ge

s

Pension as a percentage of GDP Pension as a percentage of operating expenses

134

The announcement of this government plan was widely rejected by the public, particularly CUEPACS. Many were not sure what they would encounter under the proposed new system. Whether the civil service employees would or would not contribute amicably to the new system depended on whether they expected to receive comparable benefits in terms of monthly pension payments and free health care that are not covered under the EPF (Omar 2007). A contribution scheme could favour the government by reducing its burden of operating expenses. While pension payments currently form a small percentage of government operating expenditure, the former amount is expected to escalate with increasing numbers of pensioners, longevity and inflation. The higher the amount of pension payment, the smaller is the amount for other operating expenses and financing which might increase government debt.

Even for EPF-covered workers, post-retirement financial resources form an important issue as money accumulated in the EPF is often deemed to be inadequate. The adequacy of retirement benefits is defined as 50 per cent replacement rate of the final drawn salary (Lee 2001). According to an EPF survey on the patterns of expenditure of contributors who had withdrawn all their savings since retirement, between RM510 and RM1,000 per month100 would be required to cover expenditure on basic needs excluding medical care for catastrophic illnesses (Rusma Ibrahim 2004). Nizam Yatim (2007a) indicated that EPF has accumulated savings of RM224 billion as of December 2006. However, on average, each contributor will only receive RM114,000 upon retirement at the age of 55. This means that each retiree will only receive RM475 per month to live on to 75 years old. That is effectively living in poverty since the poverty line index for Peninsular Malaysia is RM530 per month, RM585 in Sarawak and RM685 in Sabah.

A survey conducted by Prudential Assurance Malaysia Bhd. That covered 1,038 respondents in the Klang Valley, Penang, Ipoh, Johor Bharu, Kuching and Kota Kinabalu, found that only 35 per cent of the respondents were confident that the EPF and personal savings would be sufficient to support them when they retired (Chong 2007). The inadequacy of retirement expenses is stark for the low-income groups, forcing them to find different forms of social safety nets for retirement. Thus, a study by Ragayah (2003) found that more than half of her respondents (58.4 per cent) are covered by private insurance, including 23.1 per cent of low-income respondents.

There are many reasons for the inadequacy of retirement benefits. Among them

are pre-retirement withdrawals for many purposes which reduce the sums available for retirement, low returns, an absence of redistributive mechanisms, the early age of retirement/withdrawal, and the payment of lump-sum benefits of accumulated saving at retirement (Ramesh 2005: 198). Although the EPF’s main objective is to provide a retirement income, the fund allows for withdrawals for housing, medical and other pre-retirement purposes which may deplete some members’ accumulated savings by the time of their retirement, itself a typical problem in the administration of a provident fund. Table 7, which provides a summary of permitted withdrawals from EPF, shows that housing (including the redemption of a housing loan) is the principal reason for withdrawal.

100 This is the range of minimum account required for maintenance provided that the elderly does not have any more mortgages to pay and does not have to support any more dependants.

135

Although it has been proposed that financing of house purchase should be left to private banks (Lee 2001), the EPF Deputy CEO (Management and Organisational Development) has argued that the withdrawal of EPF savings for purchasing a house could be considered positive pre-retirement expenses as the house is regarded as an asset of the elderly, that is, a form of investment to support a higher level of retirement (Haim Hilman, cited in Nizam Yatim (2007d: 4). Overall, withdrawals for housing have increased, chiefly because the EPF has an easy withdrawal scheme, and partly because the government encourages home and property ownership. In 2003, the New Strategy to Boost The Economic Growth of the Nation (Strategi Baru Ke-Arah Merangsang Pertumbuhan Ekonomi Negara) outlined an property ownership programme, People’s Aspiration towards Homeownership (Harapan Rakyat Memiliki Rumah, or HARAPAN). Then Prime Minister Tun Dr. Mahathir Mohamed stated that HARAPAN could stimulate the economy, improve students’ academic achievements, avoid social problems (such as a ‘culture of loitering’), and reduce the disparity between rich and poor (Mohd Ali 2003). Indirectly, EPF housing withdrawals could help to fulfil the HARAPAN objectives.

Table 7 Summary of Allowable Withdrawals

1977 1982 1986 1990 – 1996 2007

Purchase a house up to a maximum RM 2,000 or 10 % of saving (whichever is lower)

Purchase a house 45 % of saving or 10 % of purchase price (whichever is lower)

Purchase a house all saving or 40 % of purchase price (whichever is lower)

Account I : Investment for balance exceeding RM 50,000

Account II : Purchase a house – difference between the price of the house and the loans received plus 10 % of the house price or balance in account (whichever is lower)

Redeem house loans – difference between the price of the house and loan or balance in account (whichever is lower)

Purchase a computer – up to a maximum of RM 3,500 Higher education tuition fees – account balance or tuition fees (whichever is lower)

Account III: Medical expenses – account balance or medical expenses, whichever is lower

Account II: Redeem house loans – every month

For civil servants, the reduction of accumulated savings needed for retirement is less of a concern because the pension scheme guarantees that a pension is to be received

136

every month throughout the retirement years. However, to manage the burden of increasing pension payments, the government has to find ways of ensuring that the pension trust fund can sufficiently accumulate its own savings to provide for an ageing population.

The inadequacy of retirement benefits can also arise from the mismanagement of

the lump sum payments received upon retirement. To that extent, the lump sum benefits that accrue to members at retirement may not constitute an appropriate or adequate form of social protection (Beattie 1998). Realising that periodic benefit payments are essential to secure an adequate retirement income stream, the EPF had offered to make periodic payments to its members. However, as at the end of 1996, fewer than 120 people had opted for such phased withdrawal. The EPF then introduced a voluntary annuity scheme in 2001, but this was abolished a year later due to the unsatisfactory response. To guarantee a minimum adequacy of retirement benefits, the EPF should propose to make periodic benefit payments compulsory. While individuals should be permitted to make their own spending decisions from their retirement money, the fact is there are short-sighted individuals who are likely to spend their lump sum payments very quickly.

So long as individuals are allowed to choose between a lump sum and a periodical benefit, there is a very strong tendency they will opt for the former (Beattie 1998), and not just in Malaysia. For example, the Fiji National Provident Fund offers its members a choice between the traditional lump-sum benefit and a pension for life. The pension is attractive since the annuity factors used to convert individual balances into pensions are generous at 25 per cent for single-life pensions and 16.7 per cent for joint-life pensions compared with the actuarial annuity factors calculated at 10 per cent and 8 per cent respectively. Yet only 10 per cent of the balances are converted into pensions, the rest withdrawn as lump sum payments.

The inadequacy of retirement benefits has forced some of the elderly to continue working in the labour market. Evidently, three out of ten EPF contributors who have retired must continue to work (Malaysian Trade Union Congress, cited in Nizam Yatim (2007c), often turning to low-skilled employment.

b. Social Insurance Schemes

The Employees’ Social Security Act 1969 formed the basis of a social insurance system that covers workers who earn less than RM3,000 a month. The scheme is financed by contributions by the employees and employers, and administered by a central government agency, the Social Security Organisation (SOCSO). However, since April 1993, foreign workers have been exempted from coverage by this scheme and they have to rely on the Workmen’s Compensation scheme instead. The number of members and registered employers has been increasing every year. The number of members had increased from 1 million in 1978 to 8 million in 1999 and almost 10 million in 2003.

There are two types of benefits that are administered by SOCSO, namely, the Employment Injury Insurance scheme and the Invalidity Pension scheme. The first scheme provides for medical benefit, temporary disability benefit, permanent disability

137

benefit, dependent’s benefit, death benefit, and rehabilitation benefit. The Invalidity Pensions scheme provides coverage against invalidity or death due to any cause. The benefits provided are related to temporary or permanent disability and rehabilitation, funeral grant, survivor’s pension and education benefits. Benefits are paid out in the form of periodic payments calculated on an earnings-related basis.

The Employment Injury Insurance Scheme provides protection to workers who suffer occupation-related illness (penyakit khidmat) and accidents from work-related travel. The scheme offers temporary disability benefits with a minimum payment of RM8 per day or 80 per cent of wages, permanent disability benefit with a minimum payment of RM10 per day or 90 per cent of wages as well as dependent benefits. The Invalidity Pension Scheme provides 24-hour insurance against death or invalidity and offers pension even before the age of 56. Initially, the contribution rate was 1.25 per cent of the monthly salary for the Employment Injury Scheme and 1 per cent for Invalidity Pension Scheme. At present, the contribution rate is 0.5 per cent for the former and 1.75 per cent for the latter. While they have been increased, SOCSO contributions constitute a smaller percentage of GDP than EPF contributions (Figure 13), largely attributable to the smaller number of SOCSO contributors. Yet, the total number of SOCSO recipients for various benefits has increased over time (Table 8).

Workers may be covered by the SOCSO programme in addition to the other social security retirement schemes. Salaried employees earning less than RM3,000 per month are automatically made members of SOCSO. The SOCSO was established under the Ministry of Public Works to provide for the safety and welfare of workers. The SOCSO schemes include employment-related injury insurance, pensions for invalids, medical and education benefits. As Malaysian social security programmes essentially form a two-pillar system, the SOCSO acts as the first pillar which is aimed at poverty reduction through redistribution.

The World Bank (2004) recommends a Three Pillar Model of a pension scheme. The first pillar is the public defined benefit or pay-as-you-go (PAYGO) scheme aimed at poverty reduction through redistribution. The second pillar is a mandatory private defined contribution scheme aimed at consumption smoothing, and the third pillar is a voluntary savings account. While the Malaysian social security retirement scheme can be regarded as being a second pillar, SOCSO with coverage for the entire working population could serve as a ‘first pillar’ type of social safety net.

138

Figure 13 SOCSO Contributions and SOCSO Contributions as a Percentage to GDP

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

RM

00.511.522.533.54

Perc

enta

ges

SOCSO Contributions SOCSO Contributions as a Percentage to GDP

Source: SOCSO and own calculation

Table 8 Number of SOCSO Benefit Recipients 1999–2004

Benefits 1999 2000 2001 2002 2003 2004 Temporary Disability 69,491 76,004 67,289 62,881 56,766 56,309 Permanent Disability 17,264 20,009 19,707 21,960 19,542 22,505 Dependent Benefits 25,149 25,900 27,485 29,097 31,123 32,836 Invalidity Pension Schemes 15,724 18,324 21,083 23,499 25,042 29,385 Survivors Pension 75,189 82,113 88,281 94,890 106,531 114,346 Total 202,817 222,350 223,845 232,327 239,004 255,381

Source: SOCSO Annual Reports (Various Issues)

c. Innovative Agricultural Activities

Agriculture contributed significantly to the development of the Malaysian economy after independence with a GDP share of 46 per cent in 1957. In 1960, agriculture’s share of the labour force was 80.3 per cent but it has declined to 30.9 per cent in 1987 and 18.4 per cent in 2000.

The First Malaya Plan (1956-1960), Second Malaya Plan (1960-1965), First Malaysia Plan (1966-1970) and Second Malaysia Plan (1971-1975) all stressed rural development with the promotion of the agricultural sector being the theme of national development. For some time, there was no clear policy to guide the national development of agriculture. On 12 January 1984, the First National Agriculture Policy (DPN1) was launched for the period 1984–1991. The policy emphasised the expansion of plantations to produce commodities such as palm oil and cocoa. The government invested in infrastructure development, in-situ development and the opening of new plantation land to increase the production of cocoa and palm oil.

The thrust of the Second National Agriculture Policy (DPN2) (1992-1998) was to increase productivity, efficiency and competitiveness, and expand the plantation

139

acreage especially under oil palm. One important concern was to reorient agricultural development towards higher value-added production linked, for example, to the development of agro-based industry. The Third National Agriculture Policy (DPN3) (1998-2010) sought to determine the direction of agriculture, with the Ministry of Agriculture and Agro Based Industry setting a target of getting agriculture to contribute to the attainment of a balance of trade surplus by 2010.

The impact on poverty reduction from the policy emphases of the five-year plans and the national agriculture policies, and land development and resettlement schemes, appears to have been limited because rural poverty remains an issue to be addressed. Thus, a new development strategy to improve rural-agricultural sector welfare was incorporated into the planning of the Northern Corridor Economic Region (NCER). Its aim is to raise farmers’ income and expand the size of the agricultural sector. But this strategy part of a long-term plan for 2007–2025. The aims of NCER land reform – inculcate market-driven behaviour and focus on shareholder returns so as ultimately to benefit the smallholders – are expected to be realized through organising smallholders and consolidating land management to create economically-sized lots for agricultural activities. Anchor companies will be established to amalgamate land that is privately owned by farmers and use it for commercial-scale farming. This scheme treats land ownership and land management as two separate entities: farmers retain land ownership and are entitled to a share of profits from the land, or they earn wages as workers on the land and private companies will manage more efficiently farm operations such as ploughing, seeding, fertilising and harvesting. As with the kinds of land reform of the 1970s, in-situ development would be organised, but according to ‘Agropolitan projects’ based on the concept of ‘one district, one product’ (Table 9).

Table 9 Agropolitan Projects: Location, area, and participants

No. State Project Area Number of Year ( ha. ) Participants 1 Sabah Agropolitan Pulau Banggi 4,000 1,000 19962 Kelantan Agropolitan RKT KESEDAR 1,205 381 19973 Perak Agropolitan Wilayah Ganda 1,214 400 19974 Pahang (i) Agropolitan Kg. Tg Gahai 223 80 19965 (ii) Agropolitan Pekan 1,214 400 19976 Terengganu Agropolitan Hulu Setiu 2,023 700 19977 Sarawak 8 Kedah Location will be identified 15,679 7,039 1998 TOTAL 35,044 10,000

Source: Ministry of Rural and Regional Development.

d. Reforms and Structural Changes

While the social assistance provided by Department of Social Welfare to eradicate poverty could be considered a success, Malaysia needs to reconsider the monetary and subsidy-in-kind forms of assistance. The current social assistance does not add to the value-added of the living conditions of the poor, but could increase their reliance on government assistance. It is necessary to introduce a different approach to poverty reduction and social assistance that concentrates on self-sufficiency. Each poor household, for example, could be supplied with vegetable seeds to be planted in their backyards, or assisted with a seed fund for small-scale business or agriculture.

140

In addition to the social assistance programme, more attention must be directed to the social security programmes for the elderly considering that the demographic pattern of Malaysian society is rapidly changing. Based on a division of the elderly into two groups, the ‘young-old’ (60-74 years) and the ‘old-old’ (75 years and above) (the Department of Statistics 1998), Table 10 shows an increasing trend in the number of the elderly. In 1980, the young-old and the old-old populations were 813,000 and 219,000 respectively. Two decades later, the corresponding numbers had increased to 1.15 million and 267,000. It is projected that these figures will to rise to 2.63 million for the young-old population and 574,000 for the old-old population in the year 2020, with the young-old population expanding more quickly than the old-old population. This suggests that the trend will exhibit an upward turn once the cohort of young-old advances in age (Sim 2001). While the number of the elderly is increasing, the growth in the average annual rate of the labour force is projected to decrease. Heller (1997) predicted that the average annual rate of labour force growth would decrease from 2.6 per cent between 1990 and 2000 to 1.6 per cent between 2000 and 2030, and 0.5 per cent between 2030 and 2050. With this prediction of a more rapidly ageing population, retirement financing should be priority policy issue.

Table 10 Demographic Trends of the Elderly

Numbers (‘000) Percentage Growth Rate

Year

Total (’000)

Young-Old

Old-Old

Young-Old

Old-

Old

Young-Old

Old-

Old

1980

745.2 604.5 140.7

81.1 18.9

- -

1991

1,032.3

813.1 219.2

78.8 21.1

2.7 4.0

2000

1,418.2

1,150.8

267.4

81.1 18.9

3.9 2.2

2010

2,076.1

1,688.4

387.7

81.3 18.7

3.8 3.7

2020

3,209.8

2,635.0

574.8

82.1 17.9

4.5 3.9

Source: Senior Citizens and Population Ageing in Malaysia, Department of Statistics

Inadequate retirement benefits are often associated with the nature of a provident fund that allows for withdrawals that decrease the accumulated savings for retirement. More stringent rules need to be adopted to limit withdrawals and to conserve savings for retirement years. As the withdrawal scheme has been long implemented, its removal is not feasible in view of likely resistance from contributors. One alternative is to treat withdrawals as borrowing from the fund. Any withdrawal, therefore, should be replenished by an amount equal to, less than, or up to a certain percentage of the withdrawn amount. The replenishment could be made by extra contributions from the members. This would ensure that at least additional money is put in after the withdrawal and the accumulated savings would not deplete by as much as when withdrawal is made without replenishment. A stricter rule should probably apply to the civil servants who only contribute to the

141

fund for three years. Since the contributions and accumulated savings of the civil servants are lower than those made by private sector workers. Hence, civil servants should not be permitted to make withdrawals so as to ensure they will have some extra disposable income during retirement when they receive their government pensions. Haim Hilman (cited in Nizam Yatim 2007d) suggested that EPF should create a comprehensive mechanism, to be implemented by an appropriate ministry, to monitor the buying and selling of houses by each contributor. According to Haim Hilman, EPF could thus know the status of ownership of houses purchased with funds withdrawn from EPF; and contributors who sold such houses should be required to deposit 30 per cent of any profit made from the sale into their own accounts.

The inadequacy of retirement benefits in the private and the public sectors calls for a third pillar retirement scheme as suggested by the World Bank. This may have to be a voluntary scheme. Getting people to save voluntarily for retirement is difficult. If the government attempts to make private pensions compulsory that could lead workers to run down other voluntary savings, while poorer workers will often choose to spend rather than save if there is a state safety-net. The introduction of a privatised pension scheme might increase the rate of economic growth and improve the standard of living for both the general and the elderly population (Williamson and Pampel 1998). Latin American countries (Chile and Argentina, for example) have fully or partially privatised their social security retirement programmes and so far this measure has produced positive results. However, this third-tier system has yet to take deep root in Asia, even in countries such as the Republic of Korea and Japan (Asher 2002). The Malaysian Trade Union Congress (MTUC) had drafted a plan in May 2004 that would establish a private pension scheme. It was planned that the private pension scheme would be administered by the EPF. However, this move could excessively burden the EPF’s administration of its own provident fund. Even now, the EPF sometimes has problems in processing withdrawal applications.

People who are self-employed are encouraged to contribute to the EPF, but they are not too willing to save for retirement through this channel. Those who work in the rural areas and plantation and agricultural sectors or do not participate in formal retirement schemes tend to revert to their children for financial support or live in poverty during retirement. It is not easy to ensure that the self-employed workers voluntarily contribute to the EPF. The Philippines has started to make it compulsory for self-employed workers to contribute to a pension scheme. The Republic of Korea, starting in 1995, has required self-employed workers such as farmers, fishing workers and the rural self-employed to contribute three per cent of their earnings, a rate which is to be increased by three per cent every five years until it reaches nine per cent. The costs of administering the scheme and providing protection to these groups of self-employed people are subsidised by the government. The downside to this system is the extra burden imposed on waged workers and their employers. This arises because the Korean pension benefit includes a relatively large flat-rate element that effectively means considerable redistribution to pensioners who had the lowest insured earnings during their working lives.

It is time to raise the retirement age for Malaysians from 55 years to 58 or 60 as

they now live longer due to better living conditions and health care. Compulsory retirement at 55 or 56 is wasteful of human resource capabilities; professionals and academics, for example, are groups whose experience and knowledge at that age level

142

would be an asset to any organisation, not least for passing knowledge and skills to younger workers. Already, other Asian countries have later retirement ages – 60 in Indonesia, Thailand and South Korea, and 67 in Singapore. In a 1998 memorandum, CUEPACS had requested an extension of the retirement age for civil servants.

IV. Conclusion

Malaysia has been successful in reducing poverty since poverty eradication was made an integral part of the NEP. Poverty eradication programmes were implemented alongside development plans and allocations for them were made in all Malaysia Plans. Poverty eradication measures targeted the rural area where the incidence of poverty was quite high. To that extent, rural development programmes focused on agriculture and land reform were part of the social policy and welfare regime. Land reform consisted of opening up new land by FELDA, in-situ development under IADP, and schemes for rubber and oil palm small holders managed by FELCRA. Under the NCER programme, land reform will move towards amalgamating land by MADA and IADP, keeping owners as shareholders and workers on their own land. In addition, agriculture will be linked to agro-based industry to move productivity up the value chain and increase the income generated by agriculture workers.

Besides agricultural programmes, Malaysia has social programmes and policies that benefit the public in general while targeting specific groups. General public welfare programmes are the responsibility of the Department of Social Welfare under the Ministry of Women, Family and Community Development. While the number of social assistance payments and beneficiaries has steadily increased, payments tend to favour applicants in urban areas over those in rural areas. To improve the services and extend coverage, a national social welfare policy and national policy for the elderly were enacted. These policies, with other social policies, sought to address specific socio-economic issues that arose in particular periods.

Since Malaysian society is ageing, there are concerns over the social security programmes represented by government pension and EPF. The main issue is the adequacy of retirement benefits since accumulated EPF savings are widely regarded to be inadequate to finance retirement expenses. The difficulty lies in the nature of the provident fund that allows pre-retirement withdrawals, lump sum withdrawal at retirement which potentially leads to mismanagement of savings, and low rates of return from poor management of fund investment. These factors, and the exclusion of approximately 50 per cent of the labour force from any formal retirement scheme, could result in poverty among the elderly. Social security payments in Malaysia are very low, reflecting insufficient social security protection. The social security contributions (EPF, SOCSO and Pension) form a very low percentage of GDP; it was lowest at 4.3 per cent in 2001 (when EPF withdrawals exceeded contributions for the year), and has never been higher than 10 per cent. Some reforms and alternatives to existing provisions and features of the programmes have been suggested.

143

Figure 14 Social Security Contributions and Expenditure as a Percentage to GDP

0123456789

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Pe

rnc

en

tag

es

Malaysia’s welfare regime is more ‘productivist’ than socially oriented. Social policy programmes are designed in line with the economic development but priority is given to economic expenditure. Only recently has social development been accorded more attention but the social service percentage is still small compared to the expenditure on economic and planning. The low public expenditure reflects a welfare regime that still assumes a strong tradition of family support. Yet, while family ties were traditionally strong, globalisation and industrialisation have undermined attitudes towards the family. Hence, more comprehensive social protection should be developed to ensure a continuous improvement of the people’s wellbeing.

144

References Asher, Mukul G. 2002. Behavioral ecnomics and retirement well-being in Asia.

www.spp.nus.edu.sg/docs/wp/wp21.pdf, accessed 28 December 2004. Beattie, Roger A. 1998. “Pension systems and prospects in Asia and the Pacific.”

International Social Security Review, Vol. 51, No.3, pp. 63-87. Biro Rundingan UKM, 1999. Kajian Impak dan Keberkesanan Program Pembangunan

Rakyat Termiskin (PPRT). Bloomberg, 2006. “EPF returns fell in Q1 despite high investments.” The Star, 19 May. Caraher, Kevin. 2003. “Approaches to income security in old age.” Social Policy & Society. Vol. 2, No. 4, pp. 295-304. Central Bank of Malaysia. 2006. Monthly Statistical Bulletin. Central Bank of Malaysia,

Kuala Lumpur: Chan, Kam.W. 2006. Rethinking Asian welfare model: social development or risk

production? Paper presented at The Third East Asian Social Policy Research Network International Conference on GDPism and Risk: Challenges for Social Development and Governance in East Asia. Bristol, 12-13 July.

Chang, Ha-Joon., 2004. “The role of social policy in economic development: some

theoretical reflections and lessons from East Asia.” In Mkandawire. Thandika, (ed.), Social policy in a development context. Macmillan, New York.

Chong, Pooi K. 2007. “When retirement dreams seem elusive.” The Star. 18 September, pp. 48-49. Department of Social Welfare, Ministry of Women, Family and Community. n.d. The

National Policy for Older Persons Ministry of Women. _____. 2002. Perangkaan Kebajikan Masyarakat Malaysia 2001. _____. 2004. Perangkaan Kebajikan Masyarakat Malaysia 2003. _____. 2005. Profail Statistik Jabatan Kebajikan Masyarakat 2005. Department of Statistics, Malaysia. 1998. Senior Citizens and Population Ageing in

Malaysia –Population Census Monographs Series. No. 4. National Printing Department, Kuala Lumpur.

_____. 1995. Housing Census of Malaysia 1991. National Printing Department, Kuala

Lumpur. _____. 1998. Senior citizens and population ageing in Malaysia – population census

monographs series. No.4. National Printing Department, Kuala Lumpur. _____. 2005. Population and Housing Census of Malaysia 2000. National Printing

Department, Kuala Lumpur.

145

Economic Planning Unit. 2007. Data on incidence of poverty by age group 1999-2004. Employee Provident Fund. Various issues. Annual reports various issues. Government

of Malaysia, Kuala Lumpur. Esping-Andersen, G. 1990. The three worlds of welfare capitalism. Polity press,

Cambridge. _____. 1999. The social foundations of post industrial economies. OUP, Oxford. Gough, Ian. 2000. Welfare Regimes in East Asia and Europe: comparisons and lessons.

Paper presented at the Annual World Bank Conference on Development Economics Europe 2000. Paris 27 June 2000.

Government of Malaya. 1959. Second Malaya Plan (1960-1965). Kuala Lumpur. Government of Malaysia. 1965. First Malaysian Plan 1966 – 1970. Jabatan Chetak

Negara Kuala Lumpur. _____. 1970. Second Malaysia Plan 1971-1975. Kuala Lumpur. _____. 1980. Overview Skim Pencen. Bahagian Pencen Jabatan Perkhidmatan Awam

Malaysia, Kuala Lumpur. _____. 1983. The First National Agriculture Policy 1984-1991. Kuala Lumpur. _____. 1991. The Second National Agriculture Policy 1992-1998. Kuala Lumpur. _____. 1994. Undang-Undang Malaysa: Undang-Undang Umum Jilid Dua – Akta

Pencen 1980 Akta 227 Peraturan-Peraturan Pencen 1980. Bahagian Pencen Jabatan Perkhidmatan Awam Malaysia, Kuala Lumpur.

Haaga, et. al. 1993. The Second Malaysian Family Life Survey: Overview and Technical

Report, RAND, Santa Monica. Heller, Peter S. 1997. Ageing Asian ‘Tigers’: Challenges for fiscal policy. IMF Working

Paper. www.imf.org/external/pubs/ft/wp/wp97143.pdf, assessed 2 July 2003. Holiday, I. 2000. Productivist welfare capitalism ‘Social policy in East Asia’. Political

Studies, Vol. 48, p.706-723. Jones, Catherine. 1993. The Pacific challenge: Confucian welfare states. In Catherine.

Jones (ed.), New perspectives on the welfare state in Europe. Routledge, London. Keynote Address by the Minister of Agriculture and Agro-Based Industry,

Brainstorming Session, 29–30 April 2004, Equatorial Hotel, Cameron Highlands, Pahang.

Lee, Hock L. 2001. Financial security in old age: whither the employees provident fund

of Malaysia? Pelanduk, Selangor.

146

Malayan Government. 1957. First Malaya Plan (1956-1960). Kuala Lumpur. Lembaga Tabung Angkatan Tentera. 2000. Annual Report 1999. Ministry of Rural and Regional Development. 2007. Data on area and year for

agropolitan project. Mohd. Ali, Z. 2003. “RM7.3b ransang ekonomi – PM: Manfaat langsung kepada rakyat

berpendapatan rendah.” Utusan Malaysia, 21 May. Nizam, Yatim. 2007a. “Miskin selepas pencen.” Utusan Malaysia, 19 October. _____. 2007b. “Keluaran simpanan umur bersara meningkat.” Utusan Malaysia, 20

October. _____. 2007c. ”Terpaksa kerja semula tampung hidup.” Utusan Malaysia, 20 October. _____. 2007d. ”Bantu pencarum urus harta.” Utusan Malaysia, 20 October. _____. 2007e. ”Golongan pesara nikmati keuntungan.” Utusan Malaysia. 20 October. Omar, Osman. 2007. Interview with CUEPACS. Personal communication, 3 August. Ong, Fon S. 2002. Ageing in Malaysia, A review of national policies and programmes. In David R. Phillips. and Alfred C.M. Chan (eds.), Ageing And Long-Term Care National Policies in the Asia Pacific. www.idrc.ca/en/ev-28476-201-1-DO_TOPIC.html, accessed 22 June 2007. Ragayah, Haji M.Z. 2005. Revisiting urban poverty and the issue of social protection in Malaysia. www.eadn.org/reports/urbanweb/u07.pdf, accessed 22 June 2007. _____. 2002. The impact of the financial crisis on poverty and income inequality in

Malaysia. In Shahid K. (ed.), Impact of the East Asian Financial Crisis Revisited. The World Bank Institute and the Philippine Institute for Development Studies.

Ramesh, M. 2005. One and a half cheers for provident funds in Malaysia and

Singapore. In Kwon, H. (ed.), Transforming the Developmental Welfare State in East Asia New York: Macmilan, 2005, pp. 191–207.

Rusma Ibrahim. 2004. Financing challenges facing social security schemes: The experience of the employees provident fund of Malaysia. Paper presented at the Thirteenth Regional Conference for Asia and the Pacific. Kuwait, 8-10 March 2004. _____. 2007. Interview with EPF. Personal communication, 18 July 2007. Sim, Ong F. 2001. Ageing in Malaysia: National policy and future direction. Working

Paper. Faculty of Business and Accountancy, University of Malaya. Sujata, V.P. 2007. “Providing for civil servants.” The Star. 30 August.

147

Social Security Organisation (SOCSO). Annual reports various issues. HIZI Printing Sdn. Bhd, Kuala Lumpur. Tan, Choe C. 2007. No more abandoned. New Sunday Times, 22 April. The National Policy for Older Persons Ministry of Women, Family and Community Development. United Nations. 2002. World ageing 1950-2050. Population Division, DESA.

www.un.org/esa/population/publications/worldageing19502050/index.htm, accessed 22 June 2007.

_____. 2003. Social policies in Malaysia. United Nations, New York. Wahid, W.A. 1970. Problems in Pensions Administration. Project paper in partial

requirement for Diploma in Public Administration, University of Malaya, Kuala Lumpur.

Williamson, J.B. and Pampel, F.C., 1998. Does the privatisation of social security make

sense for developing nations? International social security review, Vol. 51, No. 4, pp. 3–31.

World Bank. 2004. Averting the old-age crisis: Policies to protect the old and promote

growth. Oxford University Press, New York. Yaacob, Mohamad F. 2000. Formal old age financial security schemes in Malaysia. In

Doling, J. and Omar, R. (eds.), Social welfare east and west – Britain and Malaysia. Ashgate, Vermont: Hampshire.

148

CHAPTER 5

Welfare Regimes, Social Services and Poverty Reduction

Halim Salleh

To examine how social services changed and supported the transformation of Malaysia into a newly industrializing society, mainly during the period of rapid globalization in the 1990s, this chapter will focus on the development and growth of three major service areas, namely health, education and the provision of clean water supply. The ensuing discussion will explain how two seemingly contradictory paths of development were blended together to produce a positive development outcome. On the one hand, in the mould of East Asian state-led development, the Malaysian state wielded major control over the economy and society to realise the objective of a just and equitable society. On the other hand, the state accommodated the growth of neo-liberal market forces operating to integrate the country into the global economy. Without the latter, the general development process may have been thwarted from the very beginning. To a large extent, the ability of the state to manipulate the intricate contradictions between the public and private interests in the development process determined how much Malaysian society was transformed into a modern industrial society meeting such international development standards as the Millennium Development Goals set by the United Nations. At the same time, it will be necessary to bear in mind the overarching influence of the New Economic Policy (NEP; see Chapter 1) which changed in name and emphasis after 1990; but its fundamental principles still provide the development framework guiding every state policy and intervention in the development process.

This chapter begins with an outline of Malaysian development plans to provide

the context for discussing social service provision. After that come two sections that analyse health and education services. Each section highlights the development of the respective service over time, particularly policy shifts to accommodate the contradictory demands of private interests and NEP objectives. The chapter ends with a discussion of the following concerns: What happens to the poor? How do they cope with policy changes? How does the state protect their interests?

I. Social services and development plans

Social services in Malaysia evolved from a long history of colonial state

provision. From the beginning of state formation in colonial Malaya, key social services including health, education and water supply services have been largely provided by the state. To some extent, the private sector and the community contributed to the evolutionary process but the state had always taken the lead in managing the services. Detailed information on colonial commitment to social services is not immediately available but the state in independent Malaya continued with service provision. For instance, public expenditure on education was RM 86.3 million in 1955, but this figure was more than doubled to RM186.3 million in 1956, when the first government of independent Malaya prepared to take power. It was argued that the country needed technicians, administrators and skilled manpower for development and considered public expenditure on education and, to a lesser extent, health as investments (Ness, 1964: 313−314).

149

The expenditure patterns on social development, notably education began to show a steady increase from the early post-independence period (Snodgrass, 1980: 249), but a more serious commitment to health and education was shown with the onset of the NEP. As shown in Chart 1, the expenditure on education began at about 7 per cent of the total development expenditure in 1971 and steadily increased to more than 20 per cent in the Eighth Malaysia Plan period (2001–2005).

Although the expenditure on health has been comparatively low, below 5 per cent of the total, its impact was quite remarkable, as will be later discussed. The expenditure on water supply services showed a similarly strong commitment, exceeding 80 per cent of the total expenditure for utilities in the 1980s. However, this does not mean the services are solely provided by the state as public goods. As part of the processes of globalization in the 1990s, the privatization of the services changed the services into marketable commodities. Then, private sector players flocked to cash in on the market, but the state continues to provide a substantial part of the services because they are largely distributive in nature, and as such, instrumental in meeting the NEP’s objective of poverty eradication. Besides, education and health services were regarded as critical social investments for the industrialisation that began in the mid-1970s. A developmental state cannot ignore the need of an educated, skilled and healthy human resource for continuous growth and development. Hence, and despite its drive towards privatisation, the state allocates significant levels of resources and plays a significant role in providing the services under each of its five-year Malaysia Plans. What is the impact of the services on the general population? To what extent do they eradicate poverty? How much do they contribute to improve the standard of living and transform the society? These and other pertinent questions relating to social services will be discussed in greater detail below. II. Health Services

The first organised health services system in Peninsular Malaysia was introduced by the colonial government. Following colonial economic interests, the system was concentrated on the urban administrative centres and towns on the west coast of Peninsular Malaysia, the sites of colonial investments in plantations and mines. However, ‘large parts of the rural Malay population, as well as many lower-class Chinese and Indians, were left virtually untouched by Western medicine or sanitation and totally dependent on their respective traditional practices, remedies and healers’

Chart 1: Development Expenditure on Education and Health, Malaysia 1971-2005

0

5

10

15

20

25

MP2(1971- 75)

MP3(1976- 80)

MP4(1981-85)

MP5(1986-90)

MP6(1991-95)

MP7(1996-2000)

MP8(2001- 05)

Source: Government of Malaysia, Malaysia Plans, various years

Perc

enta

ge o

f Tot

alEx

pend

iture

Education Health

150

(Snodgrass, 1980: 250). The health, dietary and living conditions of low income Malayans (rural Malay peasants, Malay fishermen and Indian estate labourers) were described as abominable as they were virtually locked in abject poverty. Only after independence did the Ministry of Health (MOH) massively expand the medical and health infrastructure and health personnel to provide extensive services to the population, particularly in rural areas.101 To some extent the structure of health services was influenced by population distribution. In 1957, 73.5 per cent of the population in Peninsular Malaysia was concentrated in rural areas with some areas such as Perlis and Kelantan having 90.2 per cent and 100 per cent rural population respectively (Annual Report 1980:189). Since rural areas were predominantly populated by poor Malays (Bumiputra), the Malay-dominated state directed health services to be focused on developing rural health services as a way of uplifting the conditions of the rural population immediately after independence.102 Structure of Health Services

The thrust of development in rural health services began with the introduction of

a systematic primary care services in what was called the ‘Three Tier System’ in the first decade of independence. The first level of care consisted of a midwife clinic (cum quarters) catering to a 2,000 rural population. The service was focused on home delivery and home-visiting. This level was supported by a health sub-centre serving a population of 10,000 and focused on outpatient screening and mother and child health care. The third tier service consisted of a main health centre serving a population of 50,000, focused on outpatient care and dental care. All these levels were linked to tertiary-level hospitals (Annual Report 1980: 43).103 The system was maintained until the 1980s when it was revamped and replaced by a two tier system.

Under the new system, the midwife clinics were converted into rural or community clinics (klinik desa) with each clinic serving a population of 4,000. Likewise, health sub-centres were converted into main health centres, each serving a population of 15,000 to 20,000 (Annual Report 1980: 42-46).104 As it was under the previous system, primary care lay at the core of the health care system. Community clinics were focused on mother and child health care, home delivery, home-visiting, minor ailments, and family planning whereas the health centres provided outpatient care, mother and child health care, and services related to environmental health, food quality demonstration, health education, family planning, and dispensary. 101 The state was serious in its plan to provide the services; it constructed 645 mid-wife clinics, 132 health sub-centres and 31 main health centres in 1966-70 and increased the number of health personnel in 1958-70: doctors by 156 per cent, nurses 231 per cent and assistant nurses by 220 per cent (Snodgrass 1980: 273, fn. 58-59). 102 The state also began to train more ethnic Malay health personnel from the beginning of 1960s to man rural health care services because existing health personnel were dominated by non-Malays who prefer to work in urban settings (Snodgrass 1980: 265). 103 For areas further in the hinterland, particularly in the Sabah and Sarawak regions, the state also provides mobile health services using air and water transportation. There are today 151 mobile clinics from rural health centres in the country (The New Straits Times13 February.2008). 104 To complement the services in rural areas, plantations have their own health service system directly controlled by the management, either individually or in a consortium of plantation companies. Individual plantations may also appoint panel doctors consisting of private practitioners to provide health care for their workers.

151

Table 1 Structure of State Health Services in Malaysia

In 1995, the system was improved under an expanded scope service. Primary

care at the level of the health centre was expanded to include a wider range of services: curative, family health care105, dental, nutrition and dietetics service, health education and promotion, home nursing, care of the elderly, rehabilitative services, environmental sanitation, adolescent health, and community mental services. Based on a referral system that led directly or indirectly to higher-level service, the community clinics and health centres were in turn supported by secondary and tertiary healthcare at small and large district hospitals respectively. To improve the linkages, the country is divided into nine regions each equipped with a regional hospital before they are all finally linked to the national medical centre in Kuala Lumpur. The structure of rural health services which provide primary care and their linkages to the higher level services may be shown as follows (Table 1).

Specialist care is not available at community or rural clinics. Instead, the state introduced telemedicine link-ups to rural areas where doctors at the local level may teleconsult those at higher levels. Indeed, the Health Ministry claims that even ordinary people may now obtain online health information to help them treat common ailments that do not require a doctor’s presence.

Since the colonial period, the urban population has been provided with a full range of health services. Urban health services are far more developed with a whole range of 105 Family health care includes a comprehensive range of services from maternal and perinatal care, child health care services, school health services and women’s health services (Annual Report 2006: 56ff).

Level Organisation of Services Level of Service Staff Services

Midwife clinics (1:2,000)

Staff Nurses, Midwife Home delivery and home visiting

Health sub-centre (1:10,000)

Medical assistants and midwife Outpatient screening and MCH care

Three Tier System (1956-1982)

Main health centre (1:50,000 population)

Doctor and dental officer

Priority outpatient care and dental care

Rural clinics (1:4,000)

Community Nurse, Midwife, or midwives

MCH care, home delivery, home-visiting, minor ailments, and family planning Outpatient care, MCH care, environmental health, food quality demonstration, health education, family planning, and dispensary

Two-tier system (1983–present)

Health centre (1:20,000)

Doctor, dental officer, medical assistants, and public health nurses

1995: expanded scope service

Small District Hospital

Doctors, Dentists Public Health personnel and Support staff

General medical care

District Large District Hospitals

Medical, Dental, Public Health personnel with support staff and limited number of Specialists

Limited Specialist services with support Specialist services

General Hospitals

Fully staffed h ospitals with Specialists in attendance

Expanded Specialist services, tertiary care and referrals

Provincial Capital Regional

Hospital Specialists at the highest level Full range of Specialist services and referrals

Urban Centre

National Medical Centre Specialists at the highest level Specialist care at the highest level

152

services provided by polyclinics, health centres and hospitals that are equipped with up-to-date technologies and highly skilled and specialized health care personnel. Yet, to indicate the comprehensiveness of health services, the Health Ministry takes pride in claiming that there is a health clinic for every five kilometres of the country. Moreover, the World Health Organisation (WHO) has reportedly considered Malaysia to have one of the best rural health services in the world (The New Straits Times, 13 February 2008). Private and Non-Profit Health Services

Although the state provides health services based on needs and as a matter of moral responsibility, it does not preclude the right of citizens to choose their preferred health service. From the inception of modern health service provision in the country, the state has welcomed the contribution of the private sector as a complement to public sector services. As a result, private medical practitioners grew in number as the economy developed, standards of living rose, and an increasing number of people came on-stream to choose their required services and their preferred health care providers. Accordingly, private health care facilities and services grew in number and in their level of sophistication. By 2005, there were 107 private hospitals, 105 private maternity homes, ten private nursing homes, 5,826 private medical clinics, 579 private dental clinics, and 115 private haemodialysis centres. These are made up of single-person practices, group practices, and large and sophisticated consortia of medical establishments (Annual Report 2005:145). Their facilities are supplemented by those of 360 organisations providing out-patient treatment in in-house factory clinics, estate clinics, offshore clinics, and those operated by non-governmental organisations (NGOs), religious societies and hospice home care institutions (Annual Report 2006: 159). The overall private health service sector presents a formidable alternative to public health care services. It is also a force to be reckoned with: in 2005, the private health service sector employed 9,162 or 58 per cent of the total number of registered doctors in the country (Annual Report 2006: 156). But being demand driven, this private sector is largely present in the more developed parts of the country, such as Kuala Lumpur, Selangor, Johor and Penang, leading to an over-concentration of doctors in these states. Health Services, Privatisation and Globalisation

Apart from the few hospitals which are run by non-profit organisations and 95 NGO-operated haemodialysis centres, private sector health facilities are profit-oriented business enterprises operating on market principles. The growth of such profit-oriented facilities was probably the result of the official drive towards privatisation and the official dependence on private sector-led growth since the early 1980s (Fourth Malaysia Plan). The rise of globalisation in the 1990s added an impetus to the trend.

There was an apparent if limited inclination to privatise parts of the public sector services, too. In the face of a public outcry against the privatisation of essential services, particularly in health services, the state treaded cautiously and privatised only parts of hospital services, including pharmaceutical services, laundry services, hospital equipment and facility maintenance, cleaning services and clinical waste disposal. Even the partial privatisation increased the costs of services unnecessarily.106 Although there was evidently a plan to introduce a national health insurance system to cover the increasing costs of public sector services, the state has shelved the details of the plan

106 The cost of state spending on medicines and supplies for instance doubled a year after hospital pharmaceutical services was privatised (Aliran Monthly 25, 4: 4)

153

because many sectors are completely opposed to it (Citizens’ Health Initiative 1997). Apart from the poor, a large proportion of the population belongs to the low and uncertain income self-employed category. 107 As of 2004, they were estimated on average to 29 per cent of their income on food, 23 per cent on housing and 12.3 per cent on transport, not leaving very much health and other social services such as education (Department of Statistics, 2004/5: Table 2.4). Any level of premium set by a national health insurance system will definitely deprive them of basic health care.

Significantly in Malaysia, privatisation has not meant the complete divestment of public services to the private sector. Instead, going along with the private sector, the state joined an accumulation spree, either turning some of its own agencies into corporate entities or forming state-controlled companies to take over the privatised state services. Notwithstanding public suspicions that those having access to state power have manipulated the process of privatisation for their personal benefit, the expansion of private health care facilities is often associated with the establishment of state investment arms that have set up hospitals and other health care facilities to take advantage of a growing private market. This general point is illustrated by the case of KPJ Healthcare Berhad, a highly diversified business corporation that began as a subsidiary company of the Johor State Economic Development Corporation.108 In the 1980s, KPJ entered the growing market of private health care services by setting up a private specialist hospital in Kuala Lumpur. Subsequently KPJ expanded its private hospital services into health care-related businesses, including establishing a nurses’ training institute, and emerged as the market leader in the private health care industry. To date KPJ owns and operates a consortium of 23 private hospitals located in most of the major cities in the country and six private hospitals abroad (Annual Report, KPJ Healthcare Berhad 2006: 22). By comparison, the country has a total of 86 full fledged private hospitals.109

It goes without saying that large private hospitals provide their services on pure business principles with some of them operating along the lines of the health management organisations found in the USA. Owing to the expensive charges they impose on patients, their operations are well supported by private medical insurance industry which has made significant inroads in promoting the idea of a health insurance system for the country. Although private hospitals provide extensive and up-to-date high-technology services to their patients, the bulk of the private sector, particularly the private medical clinics, provides ‘first point contact’ primary care to the population who can afford them.

In the late 1990s, when globalisation reached its peak, foreign capital began to buy stakes in large hospitals in Malaysia to take a slice of the market which expanded into ‘medical tourism’. In a sense the private health sector market has matured to allow the free entry of players at any level: from one-person practices to large international consortia. To this extent, it may be noted, present private sector health services are well organised entities with the large ones among them being modeled after business corporations and multinational enterprises. They not only create a viable alternative to the state sector services, they pose a major challenge to the latter in terms of financial 107 Data from 2002 indicated that the bottom 40 per cent of the population were getting a mean monthly gross household income of RM1,019 and those in the rural areas were getting only RM699 (UNDP 2002: 47). 108 Johor is the southern most province in Peninsular Malaysia. 109 These hospitals are members of the Association of Private Hospitals Malaysia many of which are also run as single business enterprises (http://www.hospitals-malaysia.org/)

154

management, physical facilities, coverage of specialty services, and the incorporation of the latest medical technology. Indeed, the state sector is extremely challenged to avoid losing experienced manpower to the private sector. Private Health Sector Personnel

Here, it should be noted that every private medical doctor was a public health sector doctor who had left the public service. Owing to a general shortage of doctors, the state makes it mandatory for every fresh medical graduate to serve the government for a minimum of three years. Medical graduates whose studies and training had been funded by the state are contracted to serve the government for a further seven years. Only after the relevant period of compulsory service are the medical graduates free to choose where they want to operate.110 Obviously a large number of public sector health personnel leave the service even after they have attained senior positions in the public service. This is clearly shown by the rapid increase in the number of private sector doctors over time. Since they came from the same resource pool, the number of government doctors exceeded those in the private sector before 1980. By 1985, the outflow from the public sector had tipped the balance in favour of the private sector. Chart 2 shows that the disparity between the two sectors appeared in the early 1980s. With rapid growth and industrialization in the 1990s, the gap in head count between the two services expanded into a glaring difference: the private sector came to have a majority of the doctors.

Chart 2: Public and Private Doctors, 1980-2005

0100020003000400050006000700080009000

10000

1980 1985 1990 1995 2000 2005Source: Annual Report, Ministry of Health, Malaysia, various years

No.

of D

octo

rs

PublicPrivate

To some extent, the trend of doctors’ leaving government service is to be expected: by one estimate for early 2000, doctors in the government services were earning only about 10 per cent of the salaries enjoyed by their private sector counterparts (Shepard 2002). The shortage of doctors also made the work regimes stressful and depressing.111 Worse, the Public Services Department, the central state agency that regulates the terms and conditions of public service, including those of doctors, has been regarded until very recently to be indifferent to the plight of government doctors (Aliran Monthly 25,

110 After three years of compulsory services, state funded doctors may buy themselves out of the contract to serve the government after repaying the government the appropriate sum of money expended on their education. 111 As of December 2006, the public sector recruited 704 medical officers on contract basis to fill the shortage of doctors in public service. They include 158 Malaysians, presumably those who have reached the retirement age of 56 years old and 546 foreigners (Annual Report 2006:17)

155

Chart 3: Doctor-Population Ratio by States, Malaysia, 2005

0

500

1000

1500

2000

2500

3000

Malays

iaJo

hor

Kedah

Kelanta

n

Malacc

a

N.Sembil

an

Pahan

gPera

kPerl

is

Penan

g

Sabah

Sarawak

Selang

or

Trengga

nu

K.Lumpu

r

Source: Government of Malaysia, 2006: 421

Popu

latio

n

Population per doctor

4: 4).112 In the long term, the prospects of private sector services are bright due to the greater demand resulting from a variety of factors:

i. an increasing population ii. a rapid expansion of the middle class following economic prosperity

iii. the continuing congestion and time-consuming waiting hours in the public sector iv. increasing choices in the private sector following rapid expansion in the number

of facilities, and v. the convenience of choosing doctors, ward accommodation and time for

investigations and procedures.

Against these factors, perhaps only older non-market values of doing public service that are entrenched in medical ethics can retain doctors in the government service. The result is, doctors are not equally distributed across the country. The major urban centres such as Kuala Lumpur and Penang enjoy higher doctor-patient ratios. Other places such as the more rural states of Trengganu, Sabah, Sarawak, and Kedah have lower doctor-patient ratios indicating a lesser access to health care for the local population (Chart 3).

Public and private health services: a two tier system

In general, private sector health services are expensive. For instance, a normal spontaneous vaginal delivery in a private hospital would cost in excess of RM2,000. Similarly, normal ambulatory care and admissions would be beyond the means of people belonging to the bottom 40 per cent (by income distribution) of the population. In contrast, the services provided by the state are extremely cheap. Although the costs of some sophisticated investigations and procedures by specialists such as cardio-thoracic surgery and heart transplantation are expensive, the fees for basic medical and dental services follow the Fees Act 1951 – Fees (Medical) Order 1982 that limits the fee for each hospital visit, including investigations, to RM1. Moreover, a patient may obtain for 112 It is understood that the terms and conditions of service, particularly opportunities for promotions for doctors in the public service have improved in the last couple of years. However, the income gap between public and private sector doctors remains.

156

free maternal or childcare services at any government health clinic. Likewise, post-partum care by visiting family health nurses is provided without charge. Paying only the RM1 charge, an out-patient at a government or university clinic or hospital may be provided with free medication, too (Rohaizat Yon, 2004). This however applies to standard or generic drugs only.113 With admissions, however, citizens are charged RM30 for medical and surgical cases and RM15 for obstetric cases. For those who earn less than RM300 a month every part of the services is provided free of charge (Ministry of Health, 2008).114 Although the Ministry of Health recovers only three per cent of its costs through user fees (Shepard 2002) and is owed substantial amounts by local and foreign defaulters,115 basic health care provided by public sector facilities is affordable and readily available.

Taking both public and private health care services, therefore, Malaysians are basically provided with a two-tier health service system. There is a clear divide between the poor who use the public health services and those who can afford the more expensive private health care. This is especially so for in-patient care. According to the Health and Morbidity Survey 1996 (Institute of Public Health 1997, vol. 14: 32), the poorest patients seek in-patient care exclusively in public hospitals compared to only half of the richest patients. For out-patient (primary) care, however, the rich almost exclusively patronise private clinics while the poor do so to a limited extent.116 Health Services and Health Outcomes

It is common practice to measure health outcomes by indicating the availability of care (population per doctor), changes in life expectancy at birth, infant mortality rate, maternal mortality rate and the quality of life.117 On all counts, it would seem that the state strategy of providing need-based health care while promoting complementary private health care services have borne positive results. In terms of the supply of carers for the population, for instance, the population has been served with a steadily increasing number of doctors which has markedly reduced the doctor-patient ratio since about 1980 (Chart 4).

113 Patients have to pay for patented medications and parts for prosthetics or bone replacements which are certainly beyond the means of the poor (Kamaruzaman Saleh and Mohamed I .M. Ibrahim. 2005) 114 Foreigners are charged much more expensively: RM1,100 for medical and surgery admissions and RM800 for obstetric admissions. 115 A local daily, the The New Straits Times reported that both local citizens and foreigners owed the Ministry of Health hospitals a total of RM142,737,337.98 for expenses incurred between 2002 and October 2007 (The New Straits Times, 6 January 2008). 116 It must be noted here that waged workers from both the public and private sectors are provided with a panel of private clinics for primary care with the costs borne by the employers. 117 These measures are not free of methodological controversies with regards to accuracy but they are the most common set of parameters used today (Starfield 2000)

157

This trend probably made it feasible for the Ministry of Health to pay particular attention to primary care by revamping the organisation of rural health services in a big way starting from 1983. Indeed primary care is the most effective way to reduce rates of mortality and morbidity in the population compared to other strategies such as specialty care (Starfield, 2000). The final outcome is shown by the rest of the indicators noted above. For example, a quick review of data on life expectancy at birth shows that the life expectancy for both males and females has risen significantly over the last 48 years: male life expectancy rose by 15.7 years while female life expectancy improved remarkably by 18 years. Following standard gender difference in life expectancy, however, female life expectancy has improved at a far higher rate (10.48 per cent) than male life expectancy (5.5 per cent). Starting from about similar ages in 1957 (at a gap of 2.7 years), the female population dramatically outpaced the male population in the first 20 years to reach a gap of 4.7 years in 1970, and, since then, an almost constant average age gap of about 4.6 years has been maintained up to 2005 (Chart 5).

Chart 5: Life Expectancy at Birth, Malaysia, 1957-2005

0

10

20

30

4050

60

70

80

90

1957 1970 1978 1981 1985 1990 1996 2000 2005

Source: Annual Report, Ministry of Health, Malaysia, various years.

Age Male

Female

MF Gap

Much more indicative of the impact of life conditions on health is the infant mortality rate (IMR): it reflects the conditions of the first year of life as well as the mother’s wellbeing during pregnancy. Infants will avoid early death when they grow up in a favourable environment with good economic backgrounds, healthy and empowered mothers having sound knowledge of infant care and access to appropriate healthcare facilities and personnel. This favourable environment is exemplified by the low IMR in developed countries: an IMR below 5 for the OECD countries remains the measure which developing countries strive to achieve. This rate was attained by Malaysia from

Chart 4: Doctor-Patient Ratio, Malaysia, 1970-2005

4263 4321

3175

25602153

1413 1387

0 500

1000 1500 2000 2500 3000 3500 4000 4500 5000

1970 1980 1985 1990 1995 2000 2005

Source: Government of Malaysia, Malaysia Plans, various years

Pop

Per D

octo

r

Doctor-Patient Ratio

158

about 2000, most likely the result of the comprehensive primary care system instituted, particularly in rural areas, in the 1980s. As may be seen from Chart 6, the rate of infant deaths fell 94.0 per cent in the last 48 years but the most significant decline occurred in 1985 and 1990 when the rates fell to 19.95 and 13.5 respectively. By 1995, the rate had fallen to 10.5 and continued to decline until it remained steady at about 4.5 between 2000 and 2005, comparable to that of any developed country.118

The success in arresting infant deaths is also reflected in the rate of maternal death, another common measure of health status. Over the same period, as is shown in Chart 7, the rate of maternal death declined drastically – from 2.80 recorded maternal deaths per 1,000 live births in 1957 to about 0.6 in 1980. By 1990 the figure had declined to 0.3 and has remained so to 2005. The decline in the figure does not exactly show that Malaysia has joined the developed countries on this measure because Britain and USA, for example, have 8 and 11 maternal deaths per 100,000 live births respectively. But the trend shows that health status in Malaysia has improved even if a lot more may be done to create an environment conducive to maternal health.

To capture the improvement in basic indicators of health resulting from the present policy emphasis of mixing public and private health services, the government 118 It is interesting to note that World Health Report 2006 by the World Health Organisation stated that the IMR for Malaysia was 12 compared to United States at 8, United Kingdom at 6 and Japan at 4 (World Health Organization 2006: 168)

Chart 6: Infant Mortality Rate, Malaysia, 1957-2005

0 10 20 30 40 50 60 70 80

1957 1967 1977 1980 1985 1990 1995 2000 2005 Source: Annual Report, Ministry of Health, Malaysia, various years

No

Per

1,1

000

Live

Birt

hs

IMR

Chart 7: Maternal Mortality Rate, Malaysia, 1957-2005

0 0.2 0.4 0.6 0.8

1 1.2 1.4 1.6 1.8

1957 1980 1985 1990 1995 2000 2005 Source: Annual Report, Ministry of Health, Malaysia, various years

Per

1,0

00 B

irths

159

developed the Malaysian Quality of Life Index (MQLI) in 1990.119 Up to 2004, the index shows an improvement of 18.1 per cent for health against a 10.1 per cent improvement on the total MQLI. Some observers consider the outcome remarkable since the state has spent no more than four per cent of GDP on health up to 2000 and between five and seven per cent since then (Rozita Halina Hussein 2002), considerably less than the amounts (about eight per cent) spent by OECD countries. Health Services and Poverty

As some earlier chapters have noted, the poverty level has declined dramatically, to about 3.5 per cent in 2007.120 Here, it is not possible to show a direct association between health and poverty in detail. But it would appear that there is a close congruence between the rate of decline in poverty with the rate of decline in infant mortality. Although the rate of infant mortality declined faster than the rate of poverty, they seemed to equalise in 1999, after which they declined at more or less at the same rate (Chart 8). This trend suggests a correlation between better health status and being less poor.

In the view of the World Bank, good health is a source of productivity and resources used to treat illnesses may be freed for productive use (World Bank 1993: 17).121 In other words, better health simply means more rapid economic growth. This view finds some support from a study on poverty and health in 50 countries that shows that initial poverty and poor health status indicators are associated with poor economic performance (Mehrotra, 2007). Since Malaysia has had rapid economic growth in the past 50 years, and Malaysian workers’ productivity ranked third among Asian countries after Singapore and Hong Kong and ahead of Japan, South Korea and Taiwan (New Straits Times13 February 2008), it seems probable that the country’s economic

119 The index for health consists of life expectancy at birth, infant mortality rate and doctor population ratio (Economic Planning Unit 2004) 120 The Star reported the Prime Minister announced the figure just obtained from preliminary results of Household Expenditure Survey conducted last year (2007) by the Economic Planning Unit, Prime Ministers Department (The Star 29 January 2008) 121 World Development Report 1993, for instance reported that “… an otherwise average country with a child mortality of 106 (per 1,000 live births) would have a growth rate of income per capita of 1.55 per cent, whereas one with a child mortality rate of 126 would have a growth rate of 1.26 per cent (World Bank 1993: 21)

Chart 8: Poverty and Infant Mortality Rate, Malaysia, 1970-2004

0 10 20 30

40 50 60

1970 1980 1990 1999 2004

Source: Annual Report, Ministry of Health, Malaysia; Government of Malaysia, Malaysia Plans, various years

% P

over

ty /

Per 1

000

Live

Birt

hs

Poverty IMR

160

performance is strongly associated with the overall increase in health status of the population. If so, has the so-called vicious poverty and ill-health trap been sprung?122 Have health equity objectives been achieved under the market-led health development?

While absolute poverty has been substantially reduced, Malaysia does not fare too well over relative poverty. The remarkable economic growth has not changed the distribution of income by much. The top 20 per cent of the population commands 51.3 per cent of the income, only 4.4 per cent less than in 1970. The middle 40 per cent of the population gained 2.3 per cent to garner 35.2 per cent of the income in 2002, while the bottom 40 per cent improved by 2.1 per cent to have 13.5 per cent of the total income (UNDP 2004: 46). The persistence of this substantial difference in income shares between the income classes implies that relatively poor people continue to be more threatened by disease burdens compared to those in the upper income classes.

For instance, the poor face more risk factors for several diseases compared to those in higher income classes. As shown in Table 2, the prevalence of certain risk factors is more common among the poor than the rich. For example, there are more poor people who are underweight compared to the richer people and especially the richest. It is similarly so with risky health behaviour such as being averse to pap smear screening, lacking exercise and smoking. Table 2 shows that poor women are less inclined than rich women towards preventive care such as undergoing pap smear screening. However, the poor are more likely to smoke and to avoid exercise. In contrast, diabetes mellitus seems to afflict richer people more than the poor, most probably because the former have better access to a richer diet.

Table 2 Poverty and Health Behaviour by Income Class, Malaysia, 1996

Underweight Pap Smear

Ever Exercise

Ever Smoked

Known Diabetes

Household Income (RM) (BMI <18.5) (Screening Rate)

Less than 400 30.3 20.1 22.2 31.6 5.3 400–699 26.9 22 25.7 33.6 4.9 700–999 25.6 23.9 29.4 33.3 4.7

1,000–1,999 23.5 26.5 33.1 31.1 6.2 2,000–2,999 22.5 28.5 34.2 26.8 6.1 3,000–3,999 23.3 32.4 38.4 26.8 7.5 4,000–4,999 24 33.2 37.3 28.4 5.1 Above 5,000 23.5 39 38.9 26.6 7.7

Source: National Health and Morbidity Survey, 1996

Poverty poses a major problem for access to health facilities. It has been shown that the poor are located further away from any kind of health facility compared to the rich. According to an NGO shadow report on health (Table 3), a government clinic is the health facility nearest to the poorest but it is still about 5.7 kilometres away from their residence. Without personal transportation, it is quite a burden for the poorest to reach a government clinic. Other facilities, particularly a private hospital, are beyond their reach. In contrast, the richest have ready access to all facilities. Even if a private hospital was 40 kilometres away, it would present no problem to the richest who are well equipped with choices of personal transportation. 122 Many writers attributed ill-health among the poor to poverty to the extent that ill-health is considered the cause as much as the outcome of poverty. This is seen to keep the poor in an everlasting cycle of ill-health and poverty trap.

161

Table 3 Average Distance (Kilometres) from Health Facilities

by Income Quintile, 1996 Income Quintile

Government Clinic

Government Hospital

Private Clinic Private Hospital

1 (poorest) 5.7 23.6 14.2 172.3 2 4.7 17.7 7.9 108.3 3 4.5 14.9 5.8 79.7 4 4.0 12.8 4.6 56.2 5 (richest) 3.7 10.9 2.8 41.3

Source: Rozita Halina Hussein 2000

Medical treatment from a government clinic or hospital may be obtained cheaply. But in terms of affordability, the poor have no choice but to use government hospital facilities. In 1996, for instance, the mean total cost for hospitalisation in government hospitals was RM55.81123 while a patient had still to pay for patented medication and replacement parts.124 Consequently, the poor mostly seek outpatient and inpatient care from the government sector. Indeed, the poor use the government facilities for 86.5 per cent of their outpatient care and 97.1 per cent of their inpatient care. This stands in stark contrast to the rich who use government hospitals for 20.4 per cent of their outpatient care needs and 54.2 per cent of their inpatient care requirements (Rozita Halina Hussein 2002). Obviously the differential utilisation of public and private hospitals shows a clear poor-rich divide within the mixed public-private health care system. The increasing privatisation and commodification of health care services clearly benefits the rich more than the poor. The former saves time and energy from not having to endure the long queues in public hospitals while enjoying the efficiency and advantages of personalised health care in the private sector.

This issue of equity is rendered more complex by ethnicity, chiefly, an income gap between the Chinese and, respectively, the Bumiputra and the Indians (Chapter 3). The poorer Bumiputra is disadvantaged in health outcomes compared to the richer Chinese. In terms of the prevalence of recent illnesses, for example, the Bumiputra recorded a prevalence of 29.1 per cent as opposed to 23 per cent for the Chinese. This disparity is also true for illnesses in general and/or injury: the former recorded a rate of 30 compared to the 24 for the latter (Institute of Public Health 1997, vol. 3: 126). Differences in other health outcomes may also be seen in life expectancy, infant mortality and maternal mortality.

The life expectancy of the Chinese, particularly Chinese female (CF) is far higher than that of any other group (Chart 9). Starting at an advantaged level in 1957, most likely the result of being richer and having ready access to urban facilities, they have maintained the highest life expectancy throughout the development process to the present. To some extent, being female does not in itself provide an added advantage: the Malay female (MF) does not show a significant difference with Chinese male (CM). Indeed, the Indian female (IF) life expectancy is lowest.

123 The mean cost for rural and urban hospitals in 1996 was RM68.99 and RM44.56 respectively (Institute of Public Health 1997, vol. 3: 158-159) 124 It would cost a patient 1.5 week salary to pay essential medicines at government hospitals as opposed to 3.5 week salary at private hospitals.

162

The infant mortality rates (IMR) also show a large Bumiputra-Chinese gap. In 1969 the IMRs for Bumiputra and Indians were 48.8 and 52.4 for every 1,000 live births respectively compared to 31.1 for the Chinese (Annual Report 1980:193). Following the general decline, the IMR for all the three ethnic communities declined to below 10 in 2000. But a gap remained: the Bumiputra IMR was about 8 while the Chinese IMR was below 5 (UNDP, 2004: 113).

A comparable situation may be seen for the Maternal Mortality Rate (MMR). The MMR fell from 280 per 100,000 live births in 1957 to 141 in 1970 and below 20 in 1990. It is obvious that the expansion in rural health services from 1980 had had its impact. Yet, the ethnic difference alongside the decline was quite glaring. In 1970, the MMR for Bumiputra was at 211 or about four times higher than the MMR for the Chinese (49) and slightly more than double that for the Indians (100) (UNDP 2004: 133). The MMR gap between the ethnic communities began to decline rapidly and appeared to have closed by 1995 but it expanded again in 2000 (UNDP, 2004: Figure 5.2) There are many possible explanations for the ethnic difference in health status. One possibility is economic: the Bumiputra are a lot poorer than the Chinese, the latter having a mean monthly household income twice that of the former. The Bumiputra are also dominant among the rural population, and the rural-urban difference in IMR in 2005, for example, shows that rural states, such as Perlis, Kedah, Pahang, Kelantan and Trengganu, posted higher IMRs than the national rate compared to urban states such as Selangor, Penang and Kuala Lumpur (Chart 10).

Chart 10: Infant Mortality Rate by States, 2005

7 7.6

11.2

8.29.7

7.7

11.49.6

11.8

14.4

10.28.2

9.4

02468

10121416

Selang

or

Penan

gPerl

isJo

hor

Malacc

a

N.Sem

bilan

Kedah

Perak

Pahan

g

Kelanta

n

Trengga

nu

K.Lumpu

r

Malays

ia

Source: UNDP 2005: 114

Rate

(%)

Chart 9: Life Expectancy by Ethnicity, Malaysia, 1957-1990

0 10 20 30 40 50 60 70 80 90

1957 1970 1978 1981 1985 1990 Source: Annual Report, Ministry of Health, Malaysia, various years

Age

in Y

ears

M M M FC M C F I MI F

163

On the whole, it is more than likely that poor rural Bumiputra have lesser access to health care services compared to the largely urban and richer Chinese.

Certain behavioural and cultural inclinations of the Bumiputra seem to contribute further to the ethnic differences. By way of health spending, for example, the Bumiputra seem to show a lower concern and commitment to health care than the Chinese. While every ethnic group in the country spends most of their income on food and housing, the Bumiputra seem to spend proportionately less than the Chinese on health. As the Household Expenditure Survey 2004 shows, Bumiputra households spent on average 1.2 per cent (or RM22) of their monthly income for health care compared to 1.8 per cent (or RM47) spent by Chinese households (Department of Statistics, 2004/5:56). This form of health-seeking behaviour is definitely influenced by the values and priorities different groups hold in life. The same is true with the attitude towards seeking care for illnesses. Survey results show a lower proportion of Bumiputra (41.5 per cent) seeking care for recent illnesses compared to the Chinese (45 per cent). Indeed, poor people are less ready than the rich to seek care for their illnesses (Institute of Public Health 1997 vol. 3: 131). Similarly, an inappropriate attitude is shown by Malay women suffering from breast cancer. They tend to delay seeking medical care for their condition compared to Chinese women. As a result, the mortality rate for breast cancer among Malay women is much higher than the Chinese although the latter show a higher rate of prevalence (The Star, 17 August 2006). In this regard, years of health education and promotion do not seem to have significantly changed the knowledge, attitude and practice of poor rural people.

How do the poor cope with health care issues and problems? The preceding discussion shows that there are many dimensions to health equity. Poor people do suffer greater health problems than rich people, and their accessibility to health care is constrained by other factors such as physical distance from health facilities, the disadvantages of ethnicity, and, not least, their own health-seeking behaviour. Even though international observers have praise for Malaysian health services as having an extensive reach to the poor (Wagstaff, 2002: 102), a significant segment of the population is left behind, if not excluded from, mainstream health development. They avoid seeking allopathic treatment and instead self-medicate, most likely with cheaper traditional and complementary medicines (Siti Zuraidah Mahmood et al. n.d.). They are also known to patronise the services of shamans and sinseh (Chinesse traditional healers). The National Health and Morbidity Survey 19996 1996 showed that a lower proportion of people with a mean monthly household income of less RM400 sought care at government facilities within a two-week recall period compared to the highest income group (above RM5,000). The Survey report also noted that only 42.5 per cent of Malays sought care at government facilities compared to 45.0 per cent of Chinese and 51.3 per cent of Indians. Again, the people who do not seek care in hospitals tended to be concentrated in rural states such as Kelantan (36.2 per cent) and Trengganu (36.5 per cent) (Institute of Public Health 1997, vol. 3: 46–48; 186–189)

The trend towards a further commodification of health care following globalisation, and the call for government spending on health care obviously favour the rich and the urban population (Sachs 2004, Wagstaff, 2002: 98). Yet, failing to improve the economic position of the poor or to create a larger Bumiputra middle class, the state has no recourse except to improve government health care services, including those located in rural areas. Otherwise, health equity will not be achieved at all. It is imperative that the state continues to improve and expand state services besides

164

promoting private care because it is in effect the major, if not the only viable, form of health protection system for the poor. To complement the strategy, however, new and fresh approaches are needed to alter the knowledge, attitude and practice of the poor so as to improve their own health-seeking. III. Education

Education, a major area of social service, is critical to economic development. For this multiethnic country, however, the education system was developed to meet the objectives of national integration or nation-building and human resource development. Given the concern with socio-economic inequality under the NEP, the education system was also deployed as a major instrument to eradicate poverty and restructure society. The following discussion emphasises how the state controls education to build the nation and achieve NEP objectives while promoting market forces under globalisation. Evolution of the educational system Educational services evolved through the period of colonialism. In the early period of British rule, the indigenous (mainly Malay) population in Peninsular Malaysia was deeply rooted in a tradition of Islamic religious education having strong links to centres of Islamic learning in the region (such as Patani in present southern Thailand) and in the middle East (Cairo, Mecca and Medina). Secular Malay vernacular education was largely community-driven and partly assisted by the local provincial (state) administration. The Chinese and Indian populations were socialized in their own respective vernacular educational systems which were mostly independent of the state. A relatively small group from all ethnic communities was provided with education in English, principally to prepare an elite for the task of assisting the colonial power to rule the country. The colonial state only paid lip service, if that much, to educating the masses (Wong 1964).

A national system of education came into being after the landmark 1956 report on education known as the Razak Report.125 The Razak Report brought to an end the pre-independence laissez faire system that determined curricula, languages of instruction and the organization of schools. The report proposed a single and centralised national system of education with freedom for vernacular (Islamic, Chinese and Tamil) education to flourish at the primary level. The national system was conducted in the English and Malay languages with the latter used mainly in rural schools and often seen to be the inferior of the two. At the level of secondary education, independent and private schools in any language (mostly Arabic and Chinese), with or without government assistance, were allowed to operate. Such a pluralist educational system persisted until the 1970s when an integrated national system based on the Bahasa Malaysia (Malay language) was instituted but without compromising the status of vernacular schools at the primary level or the independent and private school systems at the secondary level. The change in the system discarded English as a major medium of instruction. But, in 2002, feeling the full impact of globalization, the government restored the use of English as the language for teaching Mathematics and Science in schools, and Science and Technology courses in public universities. 125 The Razak Report was prepared by Minister of Education, Dato Abdul Razak Bin Dato Hussein. It emphasised two major features of the education system: “a place in primary school for every child and a unified educational system which would promote national unity and consciousness” (Snodgrass 1980: 245)

165

Structure of Education

Today the educational services consist of a national system that begins at primary level and ends with university-level tertiary education. Education is one of the most highly organised services in the country. Centrally controlled by the Ministry of Education (MOE) located in Kuala Lumpur, all schools are governed by provincial (state) officials down to district-level officials. A school principal answers to local district officials on all matters pertaining to the daily operation of a school. This hierarchical control is strictly enforced within a culture of compliance that renders the educational system highly responsive to state policies and strategies directed from the ministerial level. Table 4 shows the present structure of the educational system.

The main distinguishing feature of the national system is the co-existence of

government and private systems of education. The government system offers parents a choice of schooling their children at the primary level in the national schools or the national type schools. Both types of schools use the same national curriculum structure except that the national schools use Bahasa Malaysia (Malay) as the medium of instruction whereas the national type schools use their own respective mother tongues, that is, Chinese (Mandarin) or Tamil. At the secondary level, however, the government system provides a single national system that conducts teaching in Bahasa Malasyia (Malay) except for the sciences and mathematics which are taught in English.126 For secondary education, therefore, parents from the national type schools will have to choose to school their children in the national schools – which require their children to spend a year in Remove Class to prepare them for the transition to learning in Malay – or send them to the private school system.

Table 4: Structure of Education in Malaysia Level Age Type of Education

National School

National Type (Chinese)

National Type (Tamil)

Private Schools

Pre-School 4-6 7 1 1 1 1 8 2 2 2 2 9 3 3 3 3 10 4 4 4 4 11 5 5 5 5

Primary

12 6 6 6 6 Examination Primary School Achievement Test 13* Remove to National Schools

13 14 1 1 14 15 2 2

Secondary

15 16 3

3 Examination Lower Secondary Assessment

16 17 4 4 Upper Secondary 17 18 5

5

Examination Malaysia Certificate of Education 18 19 Post Secondary 19 20

Pre-university, Matriculation, Foreign University, Employment

Higher 20 21 University 126 National language policy states that teaching of sciences, mathematics and technological subjects at all level, including primary school level, are to be conducted in English. As a result, all secondary school classes in the sciences schools are taught in English.

166

Education Note: * Age at joining national school system from national type Chinese or Tamil schools

Source: Ministry of Education 2004

It should be noted that children may pursue their education in the private system from primary one to tertiary level. Indeed, any student may opt to join the private system at any time and at any level. In terms of nation-building, this choice is permissible because the Ministry of Education monitors the private system through legislation and periodic evaluation to ensure that it conforms to the national curriculum, meets the national objectives of education, and offer quality education to the students (Education Act 1996). Hence, there is little real difference in the academic content of education offered by the government and private school systems. Yet, the demand for private schooling has been increasing. There is no available data on the qualitative difference between the private and government schools but it is widely held that the urban middle class prefers the exclusivity, efficiency and perceived higher quality of teaching and learning provided by private schools.

Private schools are in a class of their own. However, the state-sponsored secondary schools are distinguished by three categories: full board or residential science schools, premier (science) day schools, and normal day schools. The first two types of schools are exclusively devoted on teaching science subjects whereas the third type combines the teaching of arts with the sciences. The residential science schools are reputed to be provided with the best teachers, best facilities and the most conducive learning environment. They are perceived to be elite schools preparing ‘the leaders of tomorrow’. Entry into these schools is very competitive and only the best are selected to enroll (see below). Similarly the premier day schools have produced some of the best students, comparable if not better to some of the products from the residential science schools. This is particularly the case with the premier day schools established early in the 20th century and located in the major urban centres. However, entry into this category of school is limited to high achievers, similar to the selection of students for the residential science schools. In contrast, the normal day schools, especially those in rural areas, tend to be regarded as ‘inferior’ schools for the masses, open to all children regardless of their academic attainments or socio-economic backgrounds. The elite schools

It is evident that the education system is somewhat elitist and largely oriented towards examination-based qualifications. As may be seen from Table 4, students must take three major public examinations – the Primary School Achievement Test at the primary level, followed by the Lower Secondary Assessment and the Malaysia Certificate of Education examinations at the secondary level. On the whole, pupils are permitted to proceed from primary one to the final year of secondary education even if they perform badly in any one of the first two examinations. Those who perform well, however, may have the choice of joining the elite schools at secondary level, either to be admitted to a premier day school or a residential science school. The premier day schools admits pupils with top marks in the Primary School Achievement Test while the residential science schools select students who are the best performers in academic and extra-curricular activities at the Primary School Achievement Test and again at the Lower Secondary Assessment. While they give preference in admission to high achievers with low socio-economic backgrounds, particularly from rural areas, the residential science schools do not compromise on their academic standards. They have

167

thus established themselves as the elite schools. There are now 54 residential science schools with a total student population of 20,175 (or 0.88 per cent of a total secondary school population of 2,279,575). In principle, the residential schools are open to all children. In practice, however, they virtually constitute a Bumiputra domain, one of the major NEP projects designed to improve the socio-economic condition of the Bumiputra population through education and training in science.

To ensure that Bumiputra, particularly Malay, children are further supported in their quest for education, the state agency called the Council of Trust for the Bumiputra (better known by its Malay acronym, MARA) established a parallel system of elite residential schools called the Maktab Rendah Sains MARA (MRSM, or Mara Junior Science Colleges). When the MRSM were first set up in the 1970s, MARA selected only Bumiputra students who were unable to secure places in government residential science schools but showed promise of further development. MARA also gave priority to children from poor rural backgrounds (with family incomes of less than RM600 per month). Now the MRSM may allocate up to 10 per cent of all places in the system to non-Bumiputra children. Today, the MRSM have 3,094 non-Bumiputra students out of a total of 26,251 placed in 40 residential schools.127

The very fact that schools are classed according to student performance makes the public school examination a central feature of the educational system. While the first two examinations decide students’ entry into residential science (elite) schools, including those operated by MARA, the final exit examination for secondary education, the Malaysian Certificate of Education is the most important public examination. High achievers in this examination are selected for (in order of priority) fully state-sponsored overseas education in critical areas, 128 placement in pre-university programmes designed for entry into local public universities, and entry into diploma and skills training programmes at local training institutes. Those who are not selected for these programmes will have to seek places in expensive private higher education. This means that non-high-achieving poor students will be marginalised from higher education and compelled to enter the labour market at 18 or 19 years old. 127 MARA plans to add 16 schools to its system within the Ninth Malaysia Plan period (The Star 15 May 2008) 128 Critical areas include subject areas such as medicine, pharmacy, dentistry, engineering, accounting and to a limited extent law and business studies.

Chart 11: Enrolment in Schools, 1980-2005, Malaysia

0 500000

1000000 1500000 2000000 2500000 3000000 3500000 4000000

1980 1985 1990 1995 2000 2005

Source: Department of Statistics, Malaysia, 2006

No.

of S

tude

nts

Primary lower secondary upper secondary post-secondary

168

School Enrolment

It has to be reiterated that education in Malaysia developed in a society which was quite amenable to education in the first place. For instance, during the colonial period, all ethnic groups developed their education system based on their own ethnic and political objectives. The rise of independent Malayan and later Malaysian state required each one of them to realign their system to suit national objectives. While it may be argued (below) that the ideal integrated system of education for the country is yet to materialise, the desire for education has been quite remarkable. Even in 1960, before education was seen as critical to economic investment in general, 95 per cent of six-plus year old entered school and even with subsequent drop outs, they averaged about 90 per cent staying power in schools (Snodgrass 1980: 245). Indeed, primary education was near universality as far back as four decades ago.

Table 5 Participation Rate in Education by Level, Malaysia 1993–2003

Source: Ministry of Education 2004 Primary education was made compulsory by Section 29A of the Education Act

(amended in 2002). However, the participation rate in education does not reflect this compulsion. Even before the Act was enforced in 2003, the participation rate in education had reached remarkable heights. In 1993 the participation rate for primary education reached 98.57 per cent in what the MOE called a comprehensive system of primary education (Ministry of Education, 2004). As may be seen from Chart 11 and Table 5, primary education recorded the highest enrolment rate but the participation rate steadily declines thereafter. By university level, in 2003, only 18.7 per cent of the children in the relevant age cohort had managed to continue their education. School drop out rates

Drop outs and non-completion of schooling remain a major problem in schooling today. Despite the financial and material assistance given to them, a substantial number of children still drop out at primary and secondary levels. The records for 1995 show that 4.0 per cent or 11,800 children in the 6–11 age group did not complete their primary education while 15.5 per cent of the children leaving primary school did not continue to secondary one. A further 17 percent of those leaving secondary three did not continue to secondary four (Government of Malaysia 1996: 305; 309). In 2008, 24.5 per cent of secondary school children did not, for various reasons, complete secondary five, that is, the final stage of secondary education. It is not uncommon to assume that the majority of drop-outs are rural Bumiputra children for whom the learning environment and school facilities are less conducive thus inducing

Level Age Group Rate of Participation 1993 1998 2003

Primary 6+ - 11+ 98.57 95.06 98.40 Secondary 12+ - 14+ 85.97 85.61 84.40 Upper Secondary 15+ - 16+ 55.74 66.68 73.52 Post Secondary 17+ - 18+ 19.27 20.95 24.05 University 19+ - 24+ 5.9 14.5 18.7

169

their higher failure rates at public examinations.129 But the figure, which reportedly shocked the Prime Minister, included 35,000 supposedly more affluent urban Chinese children (The Star 15 February 2008). The reasons for the current drop-out rate cannot be ascertained but, clearly, pride in near universal primary education coexists with an inability to overcome the problems of achieving universal secondary education. University Enrolment

The growth in higher education enrolment was quite sluggish until 1995 (Chart 12). There is a long and highly politicised history of interethnic contestation to this trend. Owing to an imbalance that disadvantaged Bumiputra students in the 1960s, a quota system that reserved 60 per cent of university places in their favour was enforced through the NEP. 130 The reason was well publicised: besides the overall lack of Bumiputra students at university level, their number in the sciences was far below that of other ethnic groups. The severe shortage of a professionally trained class of Bumiputra also stoked their demand for more places at tertiary level education. Consequently, the pattern of university enrolment was significantly determined by the number of qualified Bumiputra students and not simply the availability of places.131 As more residential secondary science schools were built to cater for rural Bumiputra students and four new universities were built in the Second Malaysia Plan period (1971–1975), the number of student enrolment rose with Bumiputra students reaching more than 60 per cent of total student enrolment in 1975 (Snodgrass 1980: 250). 132 The Bumiputra students also adapted better to university education because the language of instruction was changed to Malay during the period.

129 Seventh Malaysia Plan (Government of Malaysia 1996:308) noted that in 1995, 32.9 per cent children failed their Malaysia Certificate of Examination, the exit secondary school examination: 58 per cent of them were rural children with more than half of them failing English language and 38.5 per cent failing Mathematics. 130 In the early 1960s, the only university in the country, University Malaya registered a very skewed enrolment against Bumiputra students. In the 1963-4 academic year, for instance, student enrolment showed 21 per cent Malay (Bumiputra), 60 per cent Chinese and 19 per cent Indians. Greater efforts were put in place to increase the Bumiputra number but the figure reached only 40 per cent by 1970-71 (Snodgrass 1980: 248-249). This was used by the infuriated Malay nationalist to assert for an ethnic quota system giving 60 per cent of university places to Bumiputra. This became a central feature of the NEP and persisted until 2002 when the quota system was abolished. 131 Coming largely from rural and low socio-economic backgrounds, Bumiputra students were also ill-prepared for university education because they could not cope with the English medium of instruction and they had very little grounding in the sciences to take up the subjects. This was later rectified by the change in the medium of instruction to Bahasa Malaysia and the establishment of more residential science schools in mid-1970s. 132 The universities concerned were Universiti Kebangsaan Malaysia (National University), Universiti Sains Malaysia (Science University), Universiti Pertanian Malaysia (Agriculture University) and Universiti Teknologi Malaysia (Technology University).

170

University student enrolment increased steadily but slowly in the subsequent period mainly because education as a priority in development strategy was based on the wisdom propagated by the World Bank that the best returns to investment lay in universal primary education.133 This perspective would encourage tertiary education only ‘if [it was] coupled with [a] cost-recovery-cum student loan’ approach (Psacharopoulos 2006: 335). Then, the demand for graduate workers was perceived to be less urgent. At best, the majority of skilled workers needed to support import-substituting industrialisation were those found at the lower end of technical and vocational skills. The main impetus for the increase in university enrolment came with the demand for skilled labour that was required for export-oriented industrialization: two new universities were added in the 1980s, four in the 1990s, and nine more after 2000, thus accounting for the sharp rise in university enrolment after 1995 (Chart 12).

The year 1996 may be considered a watershed year for tertiary student enrolment. The Private Higher Educational Institutions Act 1996 was introduced to liberalise education services and engendered an immediate growth in private tertiary institutions and a sudden increase in the number of tertiary students. In 1993 there were 172 private institutions with 47,000 students enrolled at certificate, diploma and degree levels. By 2000, the number of institutions had risen to 704 and the number of enrolled students had increased – to 32,480 at the degree level, 116,265 at the diploma level and 60,840 at the certificate level (Sivalingam 2007: 16). Taking into account certificate, diploma, degree, and higher degree student enrolments, the total number of students reached 731,698 in 2005 and was projected to reach 1,326,340 in 2010. Private university students constituted 46.6 per cent of total university enrolment with 32.4 per cent enrolled at first degree level. Forming 34.2 per cent of the total number of degree-level students in the university system, they showed a growth rate of 13.0 per cent per year between 2001 and 2005. In comparison, the number of students in public universities increased 4.4 per cent per year for the same period (Government of Malaysia 2006: 245). Given the strong demand for high skill and knowledge workers from the late 1990s, there is now a heavy emphasis on education in the sciences, engineering, manufacturing, and construction with 41 per cent of tertiary-level students pursuing studies in these fields. In Asia, Malaysia is second only to South Korea in science education (UNDP 2008: 322–323). 133 Psacharopoulos (2006: 335) wrote that “… the returns to primary education were higher than those in vocational or tertiary education and also that the returns to investing in women’s education were higher than the corresponding returns for men”.

Chart 12: Enrolment in Higher Education, Malaysia, 1980-2005

0 50000

100000 150000 200000 250000 300000 350000

1980 1985 1990 1995 2000 2005

Source: Government of Malaysia, Malaysia Development Plans, various years

No.

of S

tude

nts

Degree Diploma Teacher Training

171

Expenditure on Education

Formal education has been a government priority since independence. Although freedom was granted to individuals and organisations to set up independent (private) schools, a dominant government presence has been the main feature of the education system. A large proportion of the development budget was allocated to education even after the liberalisation of education services in the 1990s. From 1957 to 1977 the government spent between 14 and 21 per cent of its annual development budget on education (Snodgrass 1980: 249). This range of expenditure was retained until the period 2001–2005 (Eighth Malaysia Plan) when the government expended a greater percentage of the budget to produce more high skill and knowledge workers to meet the demands of globalisation (Chart 13). The advent of private education in the subsequent period, however, has reduced government expenditure slightly.134 Even so, among the high Human Development Index countries, Malaysia ranks among the top in terms of expenditure on education.

The development expenditure on education has been comprehensive, covering a whole range of services from primary to tertiary levels. At the primary school level, the focus was on increasing the number of schools (to reduce class sizes), improving teacher training and closing the quality gap between urban and rural schools. To maintain universal primary education and to keep students from dropping out due to poverty, the government instituted several welfare programmes for the poor. School textbooks are provided on loan to all children while examination fees and school fees are waived for all (from 2008). Poor students (with household incomes of less than RM600 per month) are given breakfast at school under the school nutrition programme, expenses for school uniforms and equipment, and, where applicable, a waiver of school hostel fees. To help them improve their studies, deserving children receive tuition vouchers to enable them to obtain additional lessons outside normal school hours. Special attention, by way of hostel accommodation, is given to children in remote areas and those from indigenous communities in the interior.135 As a matter of policy, rural

134 The percentage of expenditure for the Ninth Malaysia Plan (2006-2010) is a projection estimate and includes 2.4 per cent from private initiatives (Government of Malaysia 2006: 529) 135 Students classified as poor, that is, having a household income of RM1,000 or less, are entitled to the following assistance:

Chart 13: Development Expenditure on Eduation, Malaysia, 1986-2010

16.1 13.4

19.9

25.723

0

5

10

15

20

25

30

5MP 6MP 7MP 8MP 9MP

Source: Government of Malaysia, Malaysia Plans, various years

Per cent

172

primary school children who show promising performances at the Primary School Achievement Test are offered priority places at the full residential (science) schools under the elite secondary school programme.

A similar approach has been taken to promote universal secondary level education. Besides increasing the number of schools, teachers and relevant facilities, the school welfare programme pays special attention to poor students, particularly those from rural areas. With the categorisation of schools, however, there seems to be significant difference in terms of the overall impact of government expenditure on students. As Table 6 shows, students from secondary residential (science) schools appear to receive the lion’s share of government attention: the government has consistently spent more than twice as much on them as on students in day secondary schools.

Table 6 Education Expenditure per Student (RM), Malaysia, 2001-2005

Student Level 2001 2002 2003 2004 2005 Primary 1,601.6 1,627.5 1,844.9 1,895.3 2,069.5 Secondary (Day School) 2,357.7 2,369.2 2,536.3 2,804.1 2,911.9

Secondary (Residential School) 8,751.4 7,188.8 7,179.9 7,668.4 7,395.9

Technical/ Vocational School 9,617.8 5,146.7 8,130.5 5,481.8 5,686.5

Source: Department of Statistics 2006: 115

Running technical and vocational schools obviously requires substantial expenditure but the high expenditure on secondary residential (science) schools has to do with NEP objectives, narrowly defined here to create a special breed of Bumiputra students to address their shortage in tertiary-level science and technology courses. From this point of view, it is appropriate that they be nurtured in the most conducive learning environment. Indeed, the improvement of the Bumiputra population through education is one of the most critical and sustainable modes of intervention to redress interethnic inequality. For the same reason, the government has allocated substantial portions of the expenditure for social services to the MARA educational programmes noted earlier.136 As with the school welfare programmes, MARA provides material support, including free accommodation, to poor rural students attending its Junior Science Colleges.137

i. financial aid of RM2,200 per year for fees, books, equipments, shoes and school

uniform. ii. voucher for extra tuition classes arranged by the school iii. financial assistance if at risk of dropping out due to poverty and other

vulnerabilities 136 In the Seventh Malaysia Plan (1996-2000), for instance, MARA was expended RM707.2 million for secondary school education or 13.26 per cent of the total government budget for secondary school education. It was again allocated 14.39 per cent of the budget for the Eighth Malaysia Plan (2001-2005) (Government of Malaysia 2001:128). 137 Deputy Minister of Entrepreneur and Cooperative Development, the Ministry responsible for MARA residential schools, announced that MARA school children from households with a total income below RM600 per month are eligible for annual schooling items and equipment worth RM1,600 as well as waiver for hostel fees (The Star 19 February; 15 February 2008).

173

Government expenditure on education extends to the tertiary level. Apart from awarding selected students full scholarships for overseas education, the government provides similar financial support to students studying in critical courses in local public and private universities. While the government covers the whole spectrum of students with a bias towards Bumiputra students, MARA strictly focuses its attention on helping Bumiputra students.

Tertiary-level students who fail to secure full scholarships and bursaries are offered loans by the National Higher Education Fund (NHEF). Started in 1997, the NHEF offers educational loans to all full-time students at institutions of high learning. The loan amount varies, depending on the type of course pursued but minimally covers the tuition fees imposed by the institution concerned. By 2005, the NHEF had disbursed a total of RM7.9 billion to 678,467 tertiary students nationwide (Government of Malaysia 2006: 244). The loan scheme, however, requires a borrower to pay back the loan amount with a four per cent interest imposed at the completion of the course of study. As a result of the rapid expansion of tertiary education, however, the rush for qualification in recent years has produced major problems in graduate unemployment due to a mismatch between qualification and job requirements. In some cases, the quality and thus employability of the graduates, particularly those from private institutions, is suspect. It is estimated that 70,000 graduates are unemployed even several years after obtaining their qualifications and women graduates seem to form the majority of them. Consequently, the NHEF Board is struggling to secure repayment from its borrowers. As a lending institution, MARA, too, has found it difficult to obtain repayment from all its borrowers.138 Globalisation and Liberalisation of Education

Why were education services liberalised in 1996? What was the rationale behind the introduction of the NHEF for higher education? At first glance, it would seem that the entry of foreign direct investments into export oriented industries (mainly electrical and electronics), the opening up of markets in goods, human resources and services as well as other forces of globalisation had broken down the state’s long hold over education, particularly higher education, and allowed the private sector to commodify and turn education into a thriving business. The sharp rise in the number of private institutions and student number testifies to this fact.139 However, notwithstanding its strong adherence to the ‘Washington Consensus’ and an expressed faith in the ‘dynamic expansion of the private sector’ (Government of Malaysia 1976: 270) as the economic framework to achieve the NEP’s objectives, the liberalisation of higher education seemed to make convincing economic sense. The quota system used to promote Bumiputra education at tertiary level had forced many non-Bumiputra students to look to overseas education. By 1980, non-Bumiputra (mainly Chinese) students had accounted for 73.4 per cent of a total of 19,515 students studying overseas at degree level (Government of Malaysia 1981: 352). The total number of students going overseas

138 The National Higher Education Fund Board as well as MARA has resorted to several strategies to obtain repayment from borrowers: i. expose the borrowers by declaring their names in local newspapers, ii. black list them and their family members from borrowing in the future and, iii. suing them in the court of law. 139 Likewise with schooling: a substantial number of children were enrolled in private schools in the last decade. For instance, enrolment in private secondary schools peaked in 1995 with 163,400 children from 110,700 in 1990. The figure declined to 70,436 children in 2005 with 73.7 per cent of them enrolled in independent Chinese schools (Department of Statistics 2006: Table 3.32)

174

increased by about 9 per cent per annum from 1980 to 1985 (Government of Malaysia 1986: 491) but the enrolment in degree programmes more than doubled to 43,200 students (Government of Malaysia 1991: 163). Since 1971, the government had actively sent (mostly Bumiputra) students overseas on full scholarships for degree-level education. By 1995, there were 20,000 students fully sponsored by the government out of the total 50,600 studying at degree level. The total number of overseas students in the year was 250,600 (Government of Malaysia 1996: 315). While the increasing costs of overseas education were putting pressure on parents as well as the government, the terms of trade arising out of overseas education worked against the country, causing it to lose substantial amounts of foreign exchange (Sivalingam 2007). Since the government could not provide all the tertiary education places needed, even after starting four new universities under the Sixth Malaysia Plan 1991–1995, it was economically sensible to expand the role of the private sector. Even then, the government did not completely devolve its responsibility in education. It established nine more universities after 2000 but the pace of economic growth required more skilled and knowledge manpower than the public sector could deliver. To hold back educational opportunities and the growth of non-Bumiputra human resources would have been detrimental to national development.

Chart 14: Private and Overseas Tertiry Students, Malaysia, 1980-2005

0

20000

40000

60000

80000

100000

120000

1980 1985 1990 1995 2000 2005

Source: Government of Malaysia, Malaysia Plans, various years

Stu

dent

Num

ber

PrivateOverseas

Indeed, by the 1990s, the quota system had become an antithesis to building the

human resources badly needed for rapid industrialisation. Nor did it promote nation-building. It is common knowledge that the non-Bumiputra community did not welcome the quota system and some openly questioned the policy because the non-Bumiputra poor especially suffered from the lack of opportunities for higher education. Managing the quota system was always politically risky and the ruling coalition treaded cautiously by negotiating a workable solution. The need for political stability overrode all others but the greater challenge came from disenfranchised Bumiputra. As ‘sons of the soil’ they believed they had the right to enjoy higher socio-economic status and, through education, they expected to achieve parity with other ethnic groups. Given the tension and potential political conflicts, the non-Bumiputra community tolerated the quota system for almost three decades. By then it was evident that rapid economic development was outpacing social development: in education in particular, the demand for private education triggered a ‘proliferation of institutions offering pre-school to tertiary level education’ (Government of Malaysia 1991: 181). As such, the government had little choice but to widen the scope for direct private sector participation in education and training. Contrary to some African experiences, therefore, the commodification of education in Malaysia was largely the result of a long internal

175

contradiction of development rather than a move directly enforced by any International Monetary Fund conditionality or the World Bank.

There was another major factor in the privatisation of higher education: the government has always had direct control over all public institutions of higher learning, and directly or indirectly continues to control higher education. Besides controlling the MARA Institute of Technology, which was specifically responsible for producing Bumiputra manpower resources, the government directs and intervenes in the management of other public institutions no less than in other public service departments. The Ministry of Higher Education allocates at least 90 per cent of the annual budget and approves and monitors university curricula although the universities are free to decide on the delivery system. Accordingly, university staff is provided with the wages and privileges comparable to those received by other civil servants.

Privatisation has not meant that higher education has fallen out of government control completely. First, an institution of high learning may only be established at the invitation of the Minister of High Education. The Private Higher Educational Institutions Act 1996 and its related regulations require private institutions to follow the national higher education policy and maintain levels of teaching and delivery quality comparable to those of established public institutions. Thus, the government has set up the Malaysian Qualification Framework to ensure that private institutions conform to a basic standard in service provision. Their curricula are also reviewed every three to five years (Government of Malaysia 2006: 246). To make the private institutions more credible, there is a move by the government to consolidate the current 505 institutions into fewer but stronger institutions.

Second, even the operation of private institutions is not free of government influence. It is common knowledge that small (particularly Bumiputra) companies that set up colleges to provide pre-university training for government-sponsored students depend on the latter for their survival.140 Thus, it is inconceivable that they would deviate from government directives. In many instances, large private institutions are set up by large government-owned companies or government-linked corporations, on their own or in partnership with other (including non-Bumiputra and foreign) conglomerates.141 Although these facilitate entry of foreign capital into the field of education and symbolise integration of the education sector with the global market, they too would not deviate much from government guidelines. In fact, the interjections of government and Bumiputra interests into private higher education have become part of the mainstream NEP programme to develop a Bumiputra business community and, hence, they conform to government policies and objectives. The private institutions may function independently as business concerns: they have their own management systems,

140 The exact number of colleges owned by Bumiputra companies cannot be ascertained, but a handful received awards of contracts to conduct pre-university training on behalf of the Ministry of Higher Education. 141 Apart from Petronas Technolgy University which is owned by the national petroleum company, “Universiti Multimedia is largely due to the investment by Telekom Malaysia, the largest government owned telephone company. Universiti Tenaga Nasional is due to the investment by Tenaga Nasional, the national power company. The government has a Golden Share in these two privatized utilities … The branch campuses of the foreign universities are also due to partnership with large Malaysian conglomerates such as Sunway Berhad in the case of Monash University and Barlow-Boustead, the YTL Corporation and Lembaga Tabung Antara Tentera (LTAT) in the case of the University of Nottingham” (Sivalingam 2007: 15).

176

human resource policies, teaching programmes, and delivery systems. In the final analysis, the government directs the course of the institutions albeit in different guises.

Besides appeasing demands for more places in tertiary education, the privatisation of higher education offers opportunities to political parties to champion their ethnic causes. Being Bumiputra-dominated the government’s control over tertiary institutions, public or private, is generally perceived as synonymous with Bumiputra (particularly Malay) control. For instance, until very recently, none of the public institutions ever appointed a non-Bumiputra to the top management of any one of the public universities. Apart from the large number of Bumiputra students (until very recently due to the ethnic quota system), the academic community, for one reason or another, is also dominated by Bumiputra staff. In almost all senses, then, the public institutions are unmistakably Bumiputra institutions, an outcome of more than three decades of an NEP-based indigenisation of high education.

In response, the Chinese community demanded their own university in the 1960s

but the demand was rejected because high education was the preserve of the state (cf. Johnson et. al 2007). Only in 1972 was permission granted to the Malaysian Chinese Association (MCA), a partner in the Barisan Nasional (National Front) government, to start a college (Tunku Abdul Rahman College).142 But the elevation of the college to a full fledged university was only permitted in 2001, well after the liberalisation of education had begun. With that, the Indian community, through the Malaysian Indian Congress, another component party of the government, was permitted to set up its Asian Institute of Medicine and Technology. In 2006, Parti Gerakan Rakyat, yet another mostly Chinese-based component of the government set up the Wawasan Open University. Practically every major ethnic political party in Peninsular Malaysia has its own university today. In that sense, the liberalisation of education made it possible for everyone to take pride in claiming an association to a centre of higher learning, perhaps allaying fears in their community of being deprived of higher education.

A private institution runs on the principle of cost recovery regardless who its owners or users may be. A run-of-the-mill diploma programme may cost RM7,000 – RM8,000 in annual fees alone, a bachelor’s degree programme may require about RM20,000, and a high-end degree in medicine, say, may cost more than RM40,000 in annual tuition fees. While such programmes may attract some foreign students in the region, their costs are beyond the reach of the large majority of Malaysians. To make private higher education viable, therefore, the NHEF was created. From one perspective, this appears to democratise and free higher education from the grips of NEP policies. Indeed, it appears that access to higher education is somewhat assured. The major limitation is, the cost of borrowing bares its business face and the prospect of

142 The Establishment of UTAR began with the story of Kolej Tunku Abdul Rahman (KTAR). In 1964 the Malaysian Chinese Association (MCA) mooted the idea of setting up a college which was subsequently named after the first Prime Minister of Malaysia. On 15 September 1972 , YAB Dato' Hussein Onn, the then Minister of Education handed over the Instrument of Government to the College. A 191-acre piece of land in Setapak, Kuala Lumpur was allocated for the construction of the KTAR Campus. Today, KTAR has an enrolment of about 33,000 students taking 110 courses spread over six campuses in Kuala Lumpur, Penang, Perak, Johor, Pahang and Sabah, http://www.utar.edu.my/contentPage1.jsp?contentid=47&catid=1 accessed on 14 June 2008.

177

a long repayment period may deter many potential users. 143 Notwithstanding the consequences, defaulting on repayment seems to be the only way for many borrowers to humanise and truly liberalise private higher education! Accordingly, securing a full government scholarship, particularly for an overseas education, remains a major if not the most highly sought after privilege for school leavers. Failing that, gaining a place in the extremely cheap public universities would be just as good.144

The liberalisation of education, particularly higher education, is obviously tied to the growing integration of the national economy with the global market. Indeed, the country has long depended on the market to propel rapid economic growth in the last 50 years, only the internal (ethnic) politics gave the state the excuse to control the market to ensure peace and stability to the extent it was not ready to have an open and democratic educational system until the mid-1990s. Even then, critical issues such as scholarships for overseas education, places for preferred courses in public universities and funding for higher education continue to be debated in private and in public.145 In short, a truly democratic education system compatible with the values of globalisation has not evolved. Gender in Education

There has never been any official restriction to women’s access to education in Malaysia. Despite early (pre-independent) apprehensions and fears, particularly among Malay parents about educating their daughters in a western tradition, Malaysians accept and practice gender equality in education. Girls account for about 50 per cent of students enrolled at primary and secondary levels where children are encouraged to complete eleven years of school education, that is, commensurate with the female proportion of the population. At the post-secondary and university levels, women approximate the general global trend where they dominate higher education instead of being discriminated against. This trend began in the early 1980s in post-secondary education which consisted mainly of pre-university and college education, and then in university enrolments of the mid-1990s: women pushed beyond the ‘sacred’ 50 per cent level (Chart 15). In this sense, Malaysia has eliminated gender disparity in education and achieved the Millennium Development Goal 3 way ahead of the target year of 2015. Today women account for more than 60 per cent and 65 per cent of the student population in universities and pre-university studies respectively. It is remarkable that the women made such a big leap – from 29.1 per cent in 1970 to 61 per cent in 2006 – in higher education in just 36 years.

143 As a business, private higher education institutions expect to attract 80,000 foreign students by 2010. Currently there are 50,000 foreign students registered at the institutions (The Star 14 June 2008) 144 Annual tuition fees in public universities do not exceed RM1,500 even for the most sought after courses such as medicine and engineering. 145 Even though ethnic quota for scholarships and places in local public higher education has been officially abolished in favour of meritocracy since 2002, various ethnic groups are still questioning the transparency in the allocation process. Similarly, the system for distributing the high education loan fund is still evolving with some quarters demanding that financing system complies to the Islamic principles.

178

Following Subrahmanian (2005), however, one should see success in accessing education in relation to ‘rights in education’ and ‘rights through education’ accepting that gender disparity has been truly eliminated.146 In these latter respects, women must grapple with other issues. Consider the issue of ‘rights in education’. The Ministry of Education holds that both curriculum content and delivery of education are free from gender bias:

Each individual receives education as individual and not according to gender. They are taught the same curriculum and sit for the same public examinations. All curricula, text books and teaching materials are carefully evaluated to ensure that the contents do not stereotype females as inferior to males, or females are incapable of receiving higher education, or incapable of holding important posts in the private or public sector (Ministry of Education 2004: 21)

Detailed information on the delivery system is not available but the outcomes

suggest that female students are far from being marginalised. Moreover, there is a trend of ‘disengagement of males from the mainstream in their early teens’ while female students outperform male students in schools leading to a drastic decline in the male population at tertiary level from about 50 per cent in the 1980s to about 40 per cent in 2000 (Ministry of Education 2004: 23–24).

What is problematic is ‘rights through education’. Even though women are very much ahead of men in education enrolment at various levels, the gender gap in employment, wages and empowerment seems to restrain women from contributing their full potential to the economy and society. Female participation in the labour force declined from 47.8 per cent in 1990 to 45.9 per cent in 2006 despite the rise in the number of women in education and women’s potential contribution to the economy. One probable reason is the simple preference of employing men over women rather than skills or education level (The New Straits Times11 May 2007). In employment, the

146 Subrahmanian (2005) proposed that gender equality in education has to take into account not just ‘rights to education’, that is access to, survival and participation in education to tertiary level but also ‘rights within education’, that is gender-aware educational environment: learning content, teaching methods and processes, subject choice, assessment modes, management of peer relationships and learning outcomes and ‘rights through education’, that is the enabling outcomes linking educational quality with wider processes of gender justice in employment, work and political representation.

Chart 15: Percentage of Women in Education, Malaysia, 1970-2006

0 10 20 30 40 50 60 70

1970 1980 1990 2000 2006

Source: Government of Malaysia, 1991: 421; Ministry of Women, Family and Community Development, 2007

Perc

enta

ge

Primary Secondary Post-Secondary University

179

majority of women (in 2004) are found in the lower income occupations in the clerical and services groups with only 12.6 per cent employed in the professional or management groups (Ministry of Women, Family and Community Development 2005: Chart 2.2). Even if they dominated the management group such as in the public services in 2004 (52.4 per cent), their proportion of top management was a mere 23 per cent (Ministry of Women, Family and Community Development 2005: Chart 4.2), reflecting the generally low participation of women in positions of power.147 Although women receive the same wages and privileges as men in the public sector, women in the private sector are known to have suffered discriminatory practices. In the manufacturing sector, for example, 25.7 per cent of gender wage differentials were attributed to discriminatory practices while studies across sectors show much higher (up to more than 80 per cent) wage discrimination against women (Rahmah Ismail and Zulridah Mohd. Noor 2007).148

There is no doubt wages or the position of women at work improve substantially with the number of years of education and acquisition of skills (see below) but education alone has not been able to break through the gender barrier. In overall performance, Malaysian women achieved a value of 0.791 on the Gender Related Development Index in 2005, somewhat below other Asian countries such as Japan at 0.937 (Ministry of Women, Family and Community Development, 2005: Chart 10.2). The women have achieved their ‘rights to education’ and ‘rights in education’ but these have not met with commensurate ‘rights through education’. To improve the position of women, the government plans to achieve a ‘30 per cent quota for women in decision-making positions in the public sector’ within the Ninth Malaysia Plan period, but such a quota may prove to be a glass ceiling given women’s increasing number and superior performance in education today. The women do have a major challenge ahead before they can improve their contribution to the country’s position in the Gender Development Index. Education and Poverty

What is the impact of education on poverty? Universal primary education that creates basic literacy does not seem to bear much impact on poverty in Malaysia. Contrary to World Bank education and poverty orthodoxy which associates high economic returns with primary education,149 poverty continues to haunt the rural poor despite near universal primary education since the late 1960s. Rural poverty is structurally associated with landlessness, an unequal distribution of land, small farm

147 The lack of empowerment of women in Malaysia is shown by the following percentages of women in positions of power in 2004 and 2005: Member of Parliament (9.6 per cent ); Member of State Assembly (6.7 per cent); Member of the Senate (32 per cent); Cabinet Minister (9.1 per cent); Council Members of Local Authorities (11.6 per cent); Board of Directors, Government-linked Companies (11 per cent); Board of Directors, Corporate Sector (10.2 per cent); Top Management, Corporate Sector (13.9) (Ministry of Women, Family and Community Development 2005) 148 “Male and female workers may possess similar endowments … but wage differentials may still prevail as a result of employers’ discrimination. Employers may perceive female workers as being less productive and less creative and possessing lower leadership potential (Rahmah Ismail and Zulridah Mohd. Noor 2007: 120). 149 An economist of education at the World Bank believed that the “… the returns to primary education were higher than those in vocational or tertiary education and also that the returns to investing in women’s education were higher than the corresponding returns for men” (Psacharopoulos, 2006: 332) though not against tertiary education . indeed it encouraged tertiary education “if coupled with cost-recovery-cum student loan” (Psacharopoulos, 2006: 335).

180

size, low technology, inadequate inputs and, thus, low production and income. Primary education has little impact in such an economic context; as a qualification for waged work, it has very little market value because it does not fetch a higher wage than is paid to illiterate or unschooled workers.150 At best, it is synonymous with rural peasant work or the lowest form of employment in the informal sector; at its worst, it is a mark of unemployment and dropping out of school. Higher education is beyond the reach of most students because of the high pre-requisite entry (post secondary) qualification and the substantial costs. Young people with lower secondary education were also marginalised because when industrialisation began in the 1970s, blue collar employment preferred a more competent labour force with secondary education (Snodgrass 1980: 254–255).

For these reasons, the focus of education has changed to emphasising universal secondary education of up to eleven years or the acquisition of the Malaysian Certificate of Education (MCE) as the basic level education suitable to any form of employment. The MCE signifies the minimum educational level that may lead one out of poverty because it furnishes the basic knowledge and skills to carry out productive work. Officially, it is recognised as the minimum qualification for employment in the public and private sectors. Even the lowest grade of the MCE is perceived to show basic competence that meets the minimum acceptable level of productivity, even if one is self-employed. Higher education, particularly in science and technology remains a luxury for a privileged class (18 per cent of an age cohort) even if it is continually stressed (by the Malaysia Plans for example) as the preferred qualification for Malaysia to embark on building a knowledge economy. Indeed, it is the government’s aim to expand this class of citizens up to 40 per cent of the appropriate age group (19–23 years old)

For income generation, the MCE is the basic level that could promise to lead one out of poverty. Public sector workers having secondary school qualifications receive a minimum monthly salary of RM656.30 and certain allowances and benefits such as housing, public service allowances and an annual bonus, in all a little above the poverty line income of RM661 (in 2004). In contrast, their colleagues with lower secondary school education would have wages and benefits below the poverty level. By comparison, the private sector paid better wages for the same level of education and employment, in all cases above the poverty line.

150 In terms of human development, post-primary education earns more and primary education. In the context of traditional agriculture in Tanzania it makes little difference to people’s lives (Wedgwood 2007:384). There is “… clear evidence that the benefits of primary schooling (in Tanzania) are far from being automatic. There is some evidence of a threshold effect at secondary level, with certain benefits such as increased income and reduced fertility being much more pronounced for those with secondary education” (Wedgwood 2007:385)

181

Table 7

Wage Scales in Selected Public and Private Sector Employment 2004

Qualification Position Minimum Salary (RM) Government Private Sector Lower Secondary School

Unskilled Workers

479.64 (U1) 480.85 (N1)

733 (unskilled production operator)

Secondary School Semi-skilled Workers

656.30 (NT17) 1,097 (production operators)

Post-Secondary School (Diploma)

Skilled Workers

967.00 (W27) 1,427 (Production/Technical Supervisor)

Tertiary Education Executive 1469.81 (N41) to >15,000 in Top Management

1,825 (Marketing Executive) to >18,000 (Financial Controller)

Other Benefits Housing, cost of living

allowances, public services allowances, annual bonus (irregular), car loan, housing loans, fixed annual salary increment, family medical cover, pension (optional)

Shift and attendance allowances, bonuses (performance based), salary increment (performance based), car loans (executive and above), medical benefits.

Source : "Salary and Fringe Benefits Survey for Executives 2004" published by the Malaysian Employers Federation (MEF) www.mef.org.my and www.mida.gov.my and Public Services Department Circulars, http://www.jpa.gov.my/pekeliling/pp02/bil04/pp04-02m.htm, accessed on 16 May 2008.

In 2007, the average poverty line was raised to RM720 in Peninsular Malaysia, RM960 in Sabah and RM820 in Sarawak (Government of Malaysia 2008: 58). But the government revised the public sector wages and instituted the practice of maintaining a total monthly remuneration above RM1,000 in an attempt to ensure that public sector employees stay above the poverty line income. However, even without deliberate government intervention, those with secondary school education tend to be able to move out or stay above the poverty level income. This observation is supported by experiences elsewhere. In India, for example, an inverse relationship between education and poverty became stronger beginning at the level of secondary education. This leads to the conclusion that middle-level education may be considered to be the threshold for education to impact on poverty (Tilak 2007: 440). Given that secondary education in Malaysia has become almost universal, it is little wonder that the overall level of poverty in 2007 has been reported to have declined to 3.6 per cent (Government of Malaysia 2008: 58)

As may be seen from Table 7, skilled employees with post-secondary education and executives with tertiary education receive incomes far above poverty line levels. Here is an expected relationship between education and income because the latter increases labour productivity and income.151 Taking their example from manufacturing, Rahimah and Zulridah have demonstrated that

Workers with 13 and 16 years of completed schooling have median monthly earnings that are 24.5 percent and 61.8 percent respectively higher than workers who completed less than 9 years of schooling. The semi-skilled workers’ median monthly earnings are lower by about 11.4 percent compared to their skilled counterparts (2007: 127).

151 In India, for instance, studies on labour productivity shows that education increases labour productivity by 14 to 34 per cent and this systematically influence earnings (Tilak 2007: 440)

182

Additional training adds another 7.4 per cent to wages (Rahimah and Zulridah 2007: 127). Data from India also shows a similar relationship whereby ‘male workers’ earnings doubled if they have higher education compared to secondary education and in the case of women of similar standing, their income would increase by 80 per cent (Tilak, 2007: 440). Indeed, those having more than secondary education, particularly graduates in executive positions in the private sector, belong to a different income class altogether. Even without taking into account their allowances, annual bonuses and other benefits, they enjoy a standard of living far beyond the reach of those with only secondary school education (Table 7). The higher education enjoyed by this group of employees certainly enhances their earnings, in effect directly reduces absolute and relative poverty and, in the final analysis, promotes economic development (King et al. 2007: 352). They form the new middle class whose new income and consumption habits constitute one of the critical driving forces of the present economic growth. As current education policy seeks to raise the number and quality of those in higher education to 40 per cent of the relevant age cohort, particularly in the sciences and technology, its success would expand the middle class further, thus promising greater and possibly more sustained economic growth.152

In terms of class structure, Malaysia does not have a significant traditional middle class stratum save for a small group of (colonial) professionals, civil servants and the largely non-Bumiputra business community against the backdrop of a large peasant mass of the colonial era.153 Largely through education, a new middle class was formed by expanding the professionals, the salaried and the business classes into a new economic force. This has certainly been the case with middle class Bumiputra. As an example, Bumiputra professionals have risen from being a group of less than 10 per cent in most professions to more than 35 per cent with some professions reaching close to 50 per cent (Chart 16). Most of them were rural in origin. Through the state’s deliberate promotion of education in rural areas by various means, they were able to achieve upward social mobility, joining the middle class and going beyond to become national politicians, corporate leaders and captains of industry or becoming part of the ruling class. It is no exaggeration to suggest that many members of the present generation of Bumiputra leaders in business, industry and the civil service rose from rural villages through education provided by the positive discrimination policy of the NEP. If anything, the rise of Bumiputra in the middle and ruling classes is the best proof of what a concerted programme in education can do for poor rural children: rather than merely eradicating poverty it creates a system of socio-economic mobility to transform children of the peasantry into modern professional and corporate players at the global level.154

152 The size of the new middle class cannot be ascertained. In terms of income distribution, however, the middle 40 per cent stratum commands 35.2 per cent of the total income share in the country (UNDP 2005: 46) 153 The apex of the class structure would be a small ruling class consisting of the feudal chiefs followed by court officials, colonial advisers and merchants. 154 It is not known how mobile the children from the non-Bumiputra communities are. Up to date, I have not come into contact with any studies to the effect, if there is any.

183

Education impacts indirectly on poverty through an improvement in health

status. It is well known that more education, particularly that of women, is strongly associated with longer life expectancy and types of behaviour and choices conducive to good health (Marmot 2006: 2084; Wagstaff 2002: 100).155 And the latter is a primary prerequisite for productive life. Direct data on the education, health and income matrix is not available but the improvement in health condition and increasing life expectancy in recent decades may be associated with increasing labour productivity in Malaysia today. The productivity of the Malaysian labour force presently scores 5.6 out of 7, and ranks third in Asia (after Singapore and Hong Kong and ahead of Japan, South Korea and Taiwan).156 Certainly, education and literacy support children’s education, empower women, spawn effective communication, improve family health and creates more productive livelihoods (Nordtveit 2007). In terms of direct or indirect outcomes, education is a critical instrument for eradicating poverty and creating a new middle class. Education and Inequality

Notwithstanding its positive outcomes, education in Malaysia is quite problematic. Twenty-eight years ago, a noted observer of economic development in Malaysia wrote that, ‘Malaysian education remains highly qualification-oriented and most citizens and government officials rightly regard it primarily as a system for selecting new members of the elite and near-elite, rather than a means of acquiring learning’ (Snodgrass 1980: 259). To a large extent, the observation is still true: education largely entails a scramble for the best examination results at the school level and at tertiary level, a quest for a degree.

155 For instance, 45 demographic and health surveys shows that mothers who have had secondary schooling have under-5 child mortality rates 36 per cent lower than those with only primary schooling (Filmer and Pritchett 1999: 1311) and each year of maternal education decrease mortality rate of their children before age 5 by 5 per cent to 10 per cent … and reduces the risk of maternal mortality because of better nutrition during pregnancy and likely to seek prenatanal and antenatal care and fewer births as well as prevent about two maternal deaths for each 1,000 women (Staton and Harding 2004). 156 This was disclosed by the Director-General, Malaysian Productivity Corporation citing results of 131 country survey in Global Competitiveness Report 2007/08 by the World Economic Forum (The New Straits Times13 February 2008)

Chart 16: Percentage of Bumiputra Registered Professionals, Malaysia, 1970-2005

0

10

20

30

40

50

60

1970 1980 1990 2000 2005

Source: Government of Malaysia, Malaysia Plans, various years

Perc

enta

ge

Acountants Architects Doctors Dentists Veterinary Surgeon Engineers Surveyors Lawyers

184

The school system is organised in a hierarchy with residential science schools perceived to be the best and, therefore, deservedly given the most attention by the government. Accordingly the Primary School Assessment and lower secondary examination are used to select children for the prestigious residential school system. The most critical public examination, the MCE examination, practically determines the future of every child regardless of gender and ethnicity. Based on the MCE examination, excellent performers, numbering up to a maximum of about 2,000 per year, are selected for the most sought after programme of overseas education at renowned universities in Britain, USA, Australia and Europe. Those selected are fully funded by the state, state agencies and some government-related companies to pursue what are classified as critical courses, namely, medicine, dentistry, pharmacy, engineering and accounting. Following the government’s lead, a few private companies now offer a similar training facility.

The second-tier performers remain in the country for matriculation programmes and pre-university education to prepare them for places in local public and private universities. The third-tier performers are offered places in vocational training programmes either in universities or colleges of higher education to pursue skills training at diploma level. Finally, students of lesser academic abilities are encouraged to enrol in polytechnics and community colleges for certificate courses that prepare them for blue collar work. These manpower training programmes are provided by the state at highly subsidised rates. But students, being free to choose, may opt for a parallel system in the private sector, including seeking overseas education at their own cost or they may acquire skills through apprenticeships and on-the-job training provided by employers.

The rest of the post-secondary education students who obtain very low grades in the MCE and/or are too poor to pursue private education would enter the labour market at about 18 years old equipped with only a general education. They constitute the vast majority of young people who have no particular skill but have to be ready to take on the world of work at the bottom of the job hierarchy. Depending on the economic climate, those who have low MCE grades or no secondary qualification could face the distinct possibility of unemployment and thus poverty. Together with school drop-outs, they constitute a large low-wage or poor labour reserve.157

Tertiary level education seems burdened with a struggle for a qualification or a degree. Both the providers and seekers of qualifications broaden their search without much regard for content or quality, particularly in the 1980s and early 1990s when graduate labour was short. Quite often, private institutions of high learning were accused of making a quick profit from the sudden surge in demand for higher education. But the proliferation of qualifications was not the prerogative of the private institutions alone. As may be seen from the large number of graduate unemployed in the early 2000s, public institutions also produced what has been commonly termed as a mismatch between qualifications and job demands. The result is over 70,000 unemployed graduates today. Being discriminated against, women graduates are again taking a longer time to gain employment than the men. While this has prompted the government to establish academic accreditation agencies such as the Malaysian Quality Framework to standardise quality across institutions, the fact remains that qualifications today

157 In contrast to literacy and high qualification, poverty operates to trap the poor because it becomes a physical obstacle to learning, reduces schooling opportunities, may lead to malnutrition, increases the liability for dropping out and reduces marketable skills which in turn leads to poorly paid or no employment (Nordtveit 2007)

185

require relevant learning and skill contents. Otherwise, they do not provide any advantage over lesser qualifications.

Beginning from the hierarchical school system which selects a few for privileged schooling, therefore, the emphasis on examination scores and qualification in the educational system seems to support a policy of sustaining a system of inequality that emerged during the colonial era. The only difference is that the NEP provides avenues for Bumiputra children to be selectively recruited into the middle and ruling classes thus expanding those social strata. The society being somewhat patriarchal, its social structure is maintained with women being discriminated to some degree in job promotion in the public sector. In the private sector, women tend to be paid lower wages than men which limits the former’s movement into the higher classes, although their educational achievements should gain them greater eligibility for social mobility. In a sense, the development of the class structure fits in very well with the liberal democratic class values propagated by globalisation. Coping With Ethnicity in Education

The state has definitely transformed education from a colonial tool of governance to an instrument to develop human resources for development. The state promoted the education of the marginalised Bumiputra population through the NEP, opened the education sector to the market, and carried out several milestone policy shifts to liberalise education. Arguably the state has carried out tremendous altruistic changes to provide various kinds of assistance and opportunities for the poor to obtain the benefits of schooling by simply being diligent. Rightly the programme does not cater for the non-committed. However, the programmes are somewhat biased in favour of state-run (national) schools that are largely attended by Bumiputra children. In contrast, almost all (94 per cent) of Chinese primary school children are enrolled in vernacular schools (in 2007) and a large number of them continue their secondary education at the 60 independent Chinese secondary schools. By this very fact, the poor among them missed out on the state subsidies and assistance meant to help the poor to cope with the costs of schooling. No doubt poor non-Bumiputra can chose to school their children in national schools on financial grounds, but education has become, arguably, the most ethnicised aspect of social life in Malaysia. Even the children in (multiethnic) schools are often polarised along ethnic identities (Santhiram 1999; Joseph 2005; Brown 2007). Indeed, poor non-Bumiputra parents, being forced by convention to send their children to vernacular schools, are left to their own devices (Chiu 2000). In this context, one can speculate that a proportion of non-Bumiputra children are denied the benefits of education because they are poor. The substantial number of drop-outs among Chinese children, noted earlier, is probably associated with their poverty. Hard evidence is not available but it is likely that ethnicity has caused social mobility among poor non-Bumiputra children to be less progressive than that experienced by the Bumiputra. IV. Water Services

Until very recently, water services in Malaysia were delivered as a social good. It was provided cheaply by state governments since the beginning of the service and for that reason it has been taken for granted that it is the responsibility of the government to do so. When water became privatized along with the general drive towards commodification of social services in the 1990s, civil society protested in vain to

186

reinstate water as a basic need. Why did the state readily privatize water services when it treaded carefully on health and education? History of Water Services Similar to health and education, the history of water services is a history of state provision dating back to early colonial period. It was first started in 1804 by the colonial ruler of Penang to take care of water needs for the island colony (Penang Water Corporation 2004). In other parts of the country water supply was similarly initiated by colonial administration through the Public Works Department (PWD). Subsequently, as municipal councils became established, state PWD shared their responsibility with water supply departments of their respective municipal councils. Following local needs, water services became localised as a provincial state matter responding to local demands. This was formalized in Water Supply Enactment (1955) which empowers provincial state water supply authorities (usually the PWD) to supply clean water for domestic and commercial use within their respective state boundaries. By 1970s, most provincial state governments established their own independent state water authorities (called water board or water department) and separated PWD from water supply functions although the latter still assisted in preparatory infrastructure work for water supply system. The federal government does not interfere with local water supply systems except for the provision of funds for new infrastructure such as water storage dams, water treatment plants and water pipe networks which are considered as part of federal infrastructural development projects. These are all listed down every five years in the five-year national development plans. Structure of Services

Following the Federal Constitution crafted at independence in 1957, water remained under the purview of provincial state jurisdiction, just as other natural resources such as minerals, forest products, land, sand and rock products. To provide the services, provincial state water authorities such as PWD or water boards manage and maintain water treatment plants handed down by the federal government, operate and maintain water distribution network and bill the consumers. The costs of operation and maintenance of the water supply system are borne by the state water authority. To ensure that the water provided to the population reaches the quality standard set by World Health Organisation, all state water authorities are required by law to comply with the National Drinking Water Quality Standards set by MOH. To achieve the technical requirements for production and supply of clean and safe water, state water authorities are assisted by several federal government agencies: Department of Environment monitors rivers and river basins to ensure water resource is free from major contaminants. The MOH monitors the quality of raw water particularly at intake points as well as processes water before it reaches the consumers. The objective is to ensure that the water is free from any kinds of pollutants.158

In general, water treatment plants are sited close to urban areas or population centres to facilitate easy delivery to both domestic and industrial consumers. It supplies treated water to main storage tanks which then delivers the water to urban consumers through a grid of water pipe network constituting an urban water distribution system. Connection to the water grid is carried out by the water authority for a nominal fee and 158 Screening for water quality includes physical qualities (odour, colour, taste, debris), presence of bacteria, chemicals, heavy metals and inorganic compounds, pesticides and organic compounds (Annual Report 2006: 237).

187

water is available 24 hours a day through out the year. Consumers are charged on monthly basis according to the amount of water used (as shown on the meter placed at every point of use). Failure to settle the bill within a stipulated time period results in the water meter and thus water supply being disconnected. Reconnection upon settling the bill entails additional charges. Again the charges imposed by state water authorities for such purposes has been affordable as indicated by lack of complaints to the effect in the years before water was privatised.

Rural areas surrounding urban centres are also connected to the main water grid. Wherever large scale projects were not feasible, the MOH takes the responsibility to connect households to the nearest water mains. For areas further away from water supply grid, the government initiated what is known as the Rural Water Supply Programme 159 to reach out to the population concerned. This consists of smaller delivery `systems where water processing may not pass through the same stages of flocculation, sedimentation and fluoridation found in major water treatment plants but it is clean and suitable for human consumption. For the population which is located too far inland and beyond the economic logic of being supplied with treated water, the MOH (Engineering Division) takes the lead to organise local communities into groups of 20-50 households for collective sanitary well system, rainwater collection and gravity feed water system.160 To maintain such a system, the MOH mobilises community members for maintenance work besides requiring them to contribute a nominal monthly fee to assist with the upkeep of the system.161

For people living in agricultural (rubber, oil palm and coconut) plantations, the responsibility for water supply rests with the management. They either connect and tap into state water supply systems or establish their own systems of water supply. For rural people living in state owned land development schemes (mainly producing rubber and palm oil) in the interior known as the Federal land development (Felda) schemes, their water supply is provided by the federal government and treated as an integral part of infrastructural development planning. As they were initially mobilised to populate and work the land development schemes because they were poor, their needs became part of a major state programme to eradicate poverty through rural (land) development. Water Demand and Supply

The water harvested is mostly surface water. A large proportion of it is used for irrigation purposes, a small percentage for industrial production with the remainder used for domestic consumption. 162 With urbanization and industrialisation in the early 1970s, however, the demand for water increased rapidly to about 10 times the 1970 level or by 8–9 per cent per year in the last thirty years (SPLASH 2008). 159 “This programme comprised the construction of pipe connections from public water mains to rural areas, upgrading of existing water treatment plants (WTPs) and water supply systems as well as the construction of reticulation systems. The programme also included the implementation of alternative water supply systems” (Government of Malaysia, 2006: 380). 160 This involves tapping into highland water streams and bringing it down through a network of water pipes to individual homes through the use of gravitational force. 161 Using the systems, the MOH supplied water to 95.27 per cent of rural households (1,661,322 houses) in 2006 (Annual Report 2006: 234) 162 In 1995, the water consumed in Malaysia is mostly (97 per cent) surface water and a large proportion of it (76 per cent) is used for irrigation purposes. A smaller percentage of the water (13 per cent) is used for industrial production with the remaining (11 per cent) used for domestic consumption (Food and Agriculture Organisation 1999).

188

In the immediate future, water demand is expected to increase by 6.6 per cent a year, from 11,806 million litres a day in 2005 to 16,271 million litres a day in 2010 (The Star, 11 February 2008). This has forced the federal government to allocate substantial amounts of funds for the production and supply of water nationwide. For each five-year development plan, the government bears the task of finding new sources of water including exploring new river basins and underground water; creating new storage dams; building new or rehabilitating existing water treatment plants; expanding the capacity of existing water treatment plants; and laying new water pipe distribution systems. As may be seen from Chart 17, the rapid urbanisation of the 1980s that coincided with industrialisation saw the government spending a large percentage of the fund for energy and public utilities on water supply and distribution. This included the development of rural water supply as well. The amount of expenditure, however, fell after the 1990s due to the privatisation of water services. The work of carrying out these water development projects lies with state water authorities. Initially, however, as the water supply system was focused on urban areas, the rural population was left behind. As shown in Chart 18, about 39 per cent of the rural population were supplied with water in 1970 compared to 83 per cent of the population in urban areas. Even after it began its major rural development schemes in 1971, the government took about 30 years to rectify the rural-urban imbalance and equip rural areas with a water supply system close to that found in urban areas. By 2005, 98 per cent of the urban population and 92 per cent of the rural population were supplied with treated clean water. Only two states, Kelantan and Sabah, lag by having an overall 70 per cent and 75.5 per cent water coverage respectively.163 Other states are reaching more than 90 per cent coverage (Government of Malaysia 2006: 387; Chart 18).

163 It is possible that local politics affect rural water supply in Kelantan. Since the province has been controlled by the opposition political party since 1990, the implementation of federal development projects such as water supply seem to have progressed slower than other provinces. This results in 60 per cent and 80 per cent coverage for rural and urban water supply respectively.

Chart 17: Expenditure on Water as Percentage of Expenditure on Energy and Utilities, Malaysia, 1971-2005

0 10 20 30 40 50 60 70 80 90

100

1971-75 1975-80 1981-85 1986-90 1991-95 1996-00 2001-05

Source: Government of Malaysia, Malaysia Plans, various years

Perc

enta

ge

Expenditure on Water

189

As of 2000, there were 69 dams, located in all parts of the country, for storing

water with a total capacity of extracting 29.9 billion cu. m3 of water per year. As new water supply projects come on-stream, the supply condition should remain stable at above 95 per cent coverage with eleven out of fourteen states expected to reach 100 per cent coverage by 2010 (Government of Malaysia, 2006: 387). Problems in Water Supply

Consumers use an average of 300 litres per day per capita with urban dwellers using about 500 litres per day, in either case exceeding the United Nations recommendation of 200 litres per day (Chan 2005; Aini et al. 2007: 504). The total water stocks should theoretically serve the current and future needs of the population adequately. According to the Ministry of Energy, Water and Communication, a projected population of 33 million in 2020 would require 7.6 billon cu. m3 of water, which can be adequately served by the total water reservoir storage (in 1999) of 16.6 billion cu. m3 (Ministry of Energy, Water and Communications 2006). But water resource levels vary from one state to another. States with extensive inland territories such as Pahang, Johor, Kedah and Kelantan would have larger water catchments areas than smaller states or territories such as Kuala Lumpur and Penang. Ironically, these latter highly urbanised and industrial areas have a greater number of people to supply while the distribution of water from rich to poor resource areas cannot be carried out at will because water is a resource under the jurisdiction of state governments.

The situation is clearly illustrated by the needs of Kuala Lumpur and the surrounding areas in Selangor: with continuing urbanization and industrialization, their population is expected to double the current figure by 2010. These areas already consume 79.5 per cent of the total metered water supply of the country. The level of consumption is expected to grow at 6 per cent a year to 5,000 million litres per day by 2010 (SPLASH 2008). Although several new water supply projects came on-stream in the early 2000s, the additional supply will only last to 2007. Already the high rate of Non-Revenue Water (NRW) (at 37 per cent in 2005) has caused regular disruptions, water sharing and temporary shortages of water supply. There is no recourse except to obtain water from neighbouring water resource-rich Pahang but to do so requires federal government intervention (The New Straits Times 24 January 2007).

Chart 18: Coverage of Water Supply, Malaysia 1970-2010

0

20

40

60

80

100

120

1970 1980 1985 1990 1995 2000 2005 2010 Source: Government of Malaysia, Malaysia Plans, various years

Perc

enta

ge

Total

Urban

Rural

190

To redistribute water resources to where they are most needed, therefore, the federal government established a National Water Resource Council in 1998 and conducted a study of water resources (the National Water Resources Study 2000–2050). The Council’s function is to integrate and coordinate the development of water resources in the country and to tackle the issue of inter-state water transfers into Kuala Lumpur and Selangor. The national study was meant to be the basis for planning water needs up to 2050 and to suggest ways to organise the supply and delivery systems. The study suggested that water be transferred from Pahang to Selangor by means of the Pahang-Selangor inter-state raw water transfer project. Along with other projects necessary to meet expected demand in 2050, 47 new storage dams, at a cost of RM50 billion, would be required. As if expecting that the government would not have the financial resources for such a massive project, the study recommended the privatisation of water services. Water Quality

Water quality is a problem. States may not adhere to the same standards when producing water so that the water supply in some states is less satisfactory to consumers. For instance, the water quality in Johor had much earlier met WHO standards because Johor had access to the water treatment technology used by Singapore. In contrast, the water supply in some areas, for example, Seremban, Negri Sembilan, faces threats of pollution from industrial effluents, land development, household discharge, agricultural activities, and livestock farming. As a result, the water quality is compromised in terms of colour, odour, taste, floating debris, and foamy and oily substances (Aini et al. 2007).164 Some water providers, like the Kelantan Water Company, struggle to achieve the water quality standards even now. Institutional control is lacking. The National Drinking Water Standards was introduced in 1983 but the MOH lacks legislative power to prosecute water producers who fail to meet the standards. Now MOH monitoring shows that 84 to 93 per cent of complaints are related to various quality parameters: the presence of bacteria, chemicals, heavy metal, inorganic materials, pesticides and organic pollutants (Annual Report 2006: 237). Since each state water producer has a monopoly of the service, the population it serves risks being supplied with low quality water Delivery System

Having independent state water authorities creates different levels of efficiency

in delivery. A case in point is the issue of Non-Revenue Water (NRW).165 Water providers have been losing water during delivery through bad pipe (leaking) connections, burst pipes, dysfunctional water meters, pilfering, and water thefts. The problems partly arise from unskilled installation, delays in attending to reported problems, poor maintenance and monitoring of the pipelines and distribution network. Pilfering and water thefts are common because it is easy to tap into the distribution 164 A consumer satisfaction survey noted that 70 per cent of them reported their water quality to be poor with another 16 per cent reporting their water quality to be very poor (Aini. et al., 2007) 165 Non-Revenue Water (NRW) is the amount of water that leaks out of the delivery system through leaking and bursting pipes, reservoir overflow, inaccurate water meters, water theft and pilfering. It cannot be accounted for and considered a complete loss to the provider. In 2008, the Secretary General of the Ministry for Energy, Water and Communications Ministry Secretary General was quoted to have estimated the value of NRW at RM 1.48 billion (The New Straits Times July 16, 2008)

191

network and withdraw water for household or other uses, particularly when there is inadequate monitoring and surveillance. Besides, stealing water, unlike stealing electricity, bears no immediate threat to safety. Hence, water thefts may also be carried out on a large scale. For example, a company in Selangor had been withdrawing 450,000 litres of water per day for two years before it was apprehended (The Sun, 16 May 1998). In another incident, a sports club in Selangor was caught withdrawing water from a fire hydrant to fill up its swimming pool (The Sun, 22 May 1998). Judging from the NRW rate, an alarming volume of water is lost through inefficiency – an average of 38 to 43 per cent from 1990 to 2005, with some water authorities recording more than 50 per cent losses (Government of Malaysia 1996: 360; 2006: 387).166 Part of the problem may be that state water authorities suffer the weaknesses associated with public sector services. The federal government plans to reduce the NRW rate to 30 per cent by 2010 (Government of Malaysia 2006: 387). Water rates

Up to the late 1980s, water supply was regarded as a social service to be undertaken by the state to satisfy basic needs. Thus its cost should not burden the consumer. Hence, water rates for domestic users were quite low: ‘the average domestic rate for the first 35 m3 ranges from between RM0.31 per m3 to RM0.90 per m3 whereas the industrial rate ranges from RM0.70 per m3 to RM1.41 per m3’ (Water Industry Guide 2003: 31; Chart 19). These tariffs were highly subsidised and did not reflect the average cost of water production which was RM0.73 per m3 in 2001 (Ibid). Moreover, eight state water authorities had not increased their tariffs for ten to 20 years. Indeed, cost recovery was not the only factor in determining water rates because water was not considered to be a tradable good until very recently.

Chart 19: Water Rates by State, Malaysia 2006

00.5

11.5

22.5

33.5

Joho

r

Kedah

Kelanta

n

Malacc

a

N.Sembil

an

Pahan

gPera

kPerl

is

Penan

g

Selang

or

Trean

ggau

Bintulu

Labu

anSab

ah

Sarawak

Source: Ministry of Energy, Water and Communications, Malaysia, 2006

RM Domestic

Industrial

However, low water rates mean that many water providers (unlike, say, the

Penang Water Corporation) do not earn sufficient revenues to cover the costs of operations. They require regular (annual) financial support from the federal government to sustain their services. The situation is worse where the NRW exceeds 40 per cent (Chart 20). Even with water as a social product, such high levels of preventable loss are wasteful of public funds and the state water authorities merely exemplify a general perception that public sector services are simply inefficient. 166 In cases where the provider have been more efficient such Penang Water Corporation, it has managed to bring down NRW to about 20per cent (ibid.)

192

Chart 20: Non-Revenue Water by State, Malaysia, 2005

0

10

20

30

40

50

60

Joho

r

Kedah

Kelanta

n

Malacc

a

N.Sembil

an

Pahan

gPera

kPerl

is

Penan

g

Sabah

Sarawak

Selang

or

Trengga

nu

Labu

an

Source: Government of Malaysia, 2006: 387

Perc

enta

geNRW

Corporatisation and Privatisation

The government attempted to remedy the situation by reorganising the state water authorities to make them more market-oriented and better focused to provide adequate water supplies at affordable prices, reduce wastage and losses, and improve the reliability and quality of service. This was accomplished by the corporatisation and partial or full privatisation of water supply and distribution facilities. In what has been showcased as a home-grown social policy, the government’s first step was to corporatise some state water authorities,167 the earliest being those of Trengganu and Selangor (Table 8).

The Trengganu water authority corporatised the entire utility system, from water

supply to water treatment, distribution and billing. The water authority was still responsible for supplying water but in ways considered more responsible and accountable because it had to operate as an independent business entity and yet be answerable to the government. On the other hand, the state of Selangor retained the task of distributing water but privatised all production and water treatment plants to a few companies. The water authority has retained the difficult part of the water supply business – distribution to consumers – but privatised, arguably, the less risky operations of water treatment plants. Whether by design or improper conceptualisation, this mode of reorganising water supply system simply benefits private capital while state water authorities continue to bear losses. If anything, privatising water treatment plants offers less benefit to the consumers and is not a solution to the problem faced.

167 In Malaysia, this means the institution raises its own finance. reorganises its operations, improves its management practices, and reduces surpluses to achieve the final objective of financial independence

193

Table 8 Water Supply Privatisation

The government’s other step was to privatise water facilities fully according to

two distinct modes: either full privatisation to a wholly state-owned company (as in Kelantan and Penang) or full privatisation of water supply and distribution facilities to a private company (as in Johor). As such, the operation of every stage of the water supply and distribution system is profit-driven but the social implications of ownership according to the two modes of privatisation are quite different.

Where the company is state-owned, its profits ultimately belong to the state and

can presumably be used for the common good. The underlying ‘business philosophy’ is to have the state conduct business with the people for their own good by converting a basic need into a tradable good to tap market efficiency while retaining water as public property and being accountable to the public. However, the ownership of water services by private companies converts to private property a public good and the profits from its production and distribution. Left only as consumers of a market product, the people lose their rightful access to basic needs in favour of private capital accumulation.

There was a general and not unfounded suspicion towards private companies in

the water services industry. Most water supply companies revised their water rates soon after privatisation. Some of the rates soared. In Johor, the privatised water supplier, SAJ

State Mode of Privatisation Concession Period Kelantan:

Entire utility to Air Kelantan Sdn Bhd. (wholly owned by state government)

1995-2020 (25 years)

Johor Entire utility to SAJ Holdings Sdn Bhd. (a private company) 1999-2029 (30 years) Penang Divestiture to Perbadanan Bekalan Air Pulau Pinang, lited on

KLSE with state government holding majority share Incorporated on 25th May 2000 and listed on KLSE on 18th April 2002

Trengganu Corporatisation of entire utility Selangor Corporatised state water authority (PUAS) to retain distribution.

Seven water production and treatment plants privatised.to private companies

Syariakt Pengeluaran Bekalan Air Selangor 1999-2029 (30 Years) Pucak Niaga Sdn Bhd 1995-2020 (25 years) Syarikat Pengeluaran Bekalan Air Selangor 1999-2020 (30 years) Abass Consortium 2001-2031 (30 years) Taliworks Consortium 1991-2001 (10 years) Puncak Niga Sdn Bhd. 1994-2020 (26 years) Puncak Niaga Sdn Bhd 1999-2029 (30 years) Kedah PWD retains distribution with full privatisation to one private

company

Taliworks Consortium (full privatisation) 1995-2020 (25 years) Syarikat Air Utara (privatisation of 5 water treatment plants with

plant rehabilitation retained to PWD) 1990-2005 (10 years)

N. Sembilan Distribution retained with state water authority Sg Trip Treatment Plant 1989-1999 (10 years) Kepis Treatment Plant 1990-2000 (10 years) Sabah Distribution remains with state water authority. Privatisation of

water treatment plants to 3 private comnies

Jetanama Sdn Bhd 1992-2013 (20 years) Timatch Sdn Bhd 1993-2013 (20 years) Lahad Datu Water Supply 1985-2014 (20 years) Perak Distribution remains with state water authority Metropolitan Utility Corporation 1989-2009 (20 years) GSL Water Sdn Bhd 1989-2009 Sarawak Full privatisation in limited area Laku Management Sdn Bhd n.a. Source: Malaysia: Water Industry Guide 2003: 34-35

194

Holdings Sdn. Bhd., increased rates by 40 per cent in 2001 and again by 30 per cent in 2003 (IPS 8 February, 2008). The company made the water business a profitable venture: for the financial year 2007, ‘SAJH posted profit before tax of RM234.14 million on the back of revenue of RM571.05 million’ (RUB 2007).

In this, much depends on the state government. In Johor, the government negotiated with SAJ Holdings to lower the tariffs after the latter proposed another hefty price increase for 2007. The company agreed to reduce the proposed rate by 26 per cent but continued to charge consumers 2.3 per cent above the previous level. Yet the company made ample profit even with 36 per cent NRW (Chart 20) because it charged RM0.90 per cubic metre, the highest rate in the country. In contrast, Penang’s privatisation strategy showed greater public responsibility. The state government was the majority shareholder of the company which offered the rest of its equity to its workers and the public. As Charts 19 and 20 show, Penang has the lowest NRW (19 per cent), sells water at the lowest rate (RM0.31 per cubic metre) and still made a profit of RM50–60 million a year (Santiago 2005). And up to July 2008 the privatised Penang Water Authority was the only water provider that gave free water to the hardcore poor.168 Civil Society Protests

The privatisation of water services was contested. Major protests, including street protests, were mounted by the Coalition Against Water Privatisation, an ad hoc coalition of 26 civil society groups. They demanded that water be preserved as a basic need, not turned into a commodity for making profit. They argued that privatisation would raise water rates which, since there was no alternative, would impose an extra burden on the poor (Neto 2005). The protests had no impact on the progress of privatisation. The government introduced new legislation (Water Services Industry Act 2006) to strengthen the framework for privatisation and established the National Water Services Commission (locally known by its Malay acronym, SPAN) (The New Straits Times 1 May 2006) .The Commission was given the power to regulate water supply services while ownership and control of water resources, dams and catchment areas remained with state governments (Government of Malaysia 2006: 381). The Water Services Industry Act 2006 took over water and sewerage services from state governments and regulated them via a single authority. In this way the distribution of water, including inter-state transfers of water, may be carried out with lesser obstacles. The Water Services Industry Act requires the licensing and registration of all water providers which are required to contribute to a Water Industry Fund. The Ministry of Finance set up a Water Asset Management Company ensure there would be sufficient funds to develop water infrastructure, and improve the quality of water services together with SPAN which would regulate the technical and economic aspects of the industry.

In a sense, water services have come full circle. Responding to industry weaknesses, including fragmented providers and higher tariffs to consumers, the federal government plans to buy over the water business from all water providers, privately owned or state run. Thus the federal government hopes to check the excessive profits of water companies through a common tariff system, a promise to improve water quality and supply, and a plan to share and distribute nationalised water resources according to need. Under the new arrangement, common legislation may be enforced throughout the 168 As of July 2008, the Selangor provincial state began to provide the first 20 cubic meters of water free of charge as part of its promise before the 2008 general elections (The New Straits Times 25 April 2008)

195

country thus terminating inefficient and fragmented responsibilities for water services. This process is expected to be competed by the end of 2009. By 2010, the new institutions expect to integrate water and sewerage services for the whole country into an “efficient and holistic water industry with clear, transparent and consistent regulations for the benefit of all consumers’ (The Star, 15 August 2008). To date the federal government has bought over the loss-making state-owned water provider in Malacca while holding intensive negotiations with other state water providers (The Star 13 February 2009; The Sun, 8 August 2008). However, little information has been made available about how tariffs are calculated. Nor has there been an explicit expression of concern for consumer rights. There is only a warning that consumers will be denied the use of water if they failed to settle their water or sewerage bills on time (The New Straits Times, 1 May 2006).

With the proposed reorganisation, the federal government plans to spend at least RM12 billion, under the Ninth Malaysia Plan, on water infrastructure to streamline the water services. Given the pattern of privatisation and contracting system seen so far, current water companies and their associates face no immediate danger of falling out of the water business altogether. If anything, industry analysts expect that those companies may have a windfall in new and bigger contracts (The Star, 11 February 2008). It is likely the water industry will sustain corporate profits rather than protect consumer wellbeing. Impact on Poverty

Water is a conveyance medium of pathogens, both microbial and inorganic compounds and a habitat and host for vectors (United Nations 2003: 103). Clean water for drinking, cleaning and proper sanitation is associated with major health benefits because it reduces the risks of microbial infections from food, water and vector borne diseases. A clean water supply must be complemented with an improvement in sanitation for effective prevention of diseases (Anonymous, 2004; Bartram et al, 2005) and reducing the chances of exposure to hazards posed by inorganic compounds in polluted water. Clean water has been shown to reduce infant deaths and promote the growth rate among 24-month old children (Checkley et al, 2004).169 Apart from its immediate health benefits, the supply of clean water improves productivity by reducing the number of days lost at work due to illnesses. It promotes school attendance among children, particularly female children because they do not have to spend time fetching water, and promotes gender equality, especially among the poor because they have time and health to participate in economic activities (Asian Development Bank 2006: 2).170

169 Clean water supply and sanitation is an effective way to combat waterborne and vector-borne diseases: 88% of diarrhoeal diseases is attributed to unsafe drinking water, inadequate sanitation, and poor hygiene; diarrhoea morbidity is reduced by around 21% through improved water supply and by around 37% through improved sanitation; Improving access to water and better hygiene can reduce trachoma morbidity by 27%; safe dinking water and basic sanitation combined with better hygiene can reduce morbidity from ascariasis by 29%; and basic sanitation can reduce schistosomiasis by up to 77% (Bartram et al. 2005) 170 In both Asian and African cases, fetching water from water sources as far as 6 kilometers away from homes is predominantly the work of women and girls (Asian Development Bank 2006: 3).

196

Through multiplier effects, ultimately, clean water brings about socio-economic improvements to the poor.171

To some extent the Malaysian experience testifies to all this. About 95 per cent of the population receive clean water supply in their homes.172 The latest National Health and Morbidity Survey III conducted by MOH noted that 96.8 per cent of the population use flush toilets in their homes (Institute for Public Health 2008: 15). Consequently, the incidence of water-borne diseases has declined dramatically, to less than 4 cases per 100,000 population since 2000 (Chart 21).Likewise, the prevalence of Acute Diarrhoeal Diseases has declined to about 5.5 and 4.7 per cent in rural and urban areas respectively. Although there is no direct information that access to clean water improves productivity and achievement in education, the improvement in the provision of water and sanitation has occurred in tandem with the increase in school enrolment (particularly among females), improvement in health status, and processes of urbanisation, industrialisation and economic growth.

Chart 21: Water Borne Diseases, Malaysia, 1981- 2006

0

2

4

6

8

10

12

14

16

1981 1985 1991 1995 2000 2005 2006

Source: Annual Report, Ministry of Health, Malaysia, Various Years

Inci

denc

e R

ate

Per

100

,000

P

opul

atio

n CholeraTyphoidDysentery

Water and the Poor Unlike the concessions and subsidies in health and education that the poor receive, water is now a commodity for which the poor must pay unless exempted by a rare water provider (cf. Steinberg 2004). In general, tariff concessions are given only to low-volume consumers regardless of socio-economic status (low rate for the first 20 cubic meters). Similarly, the charge for a connection to the water pipe grid is the same for all consumers. A water deposit costs RM500 (in Kuala Lumpur) and if one were to reconnect a disconnected installation, the total charge may reach RM1,440 in 2008 (The Star, 19 March 2008), double the monthly amount considered to be the poverty level income. The alternative is no better. The National Health and Morbidity Survey III (Institute for Public Health 2008:13) reported that some Malaysians may dig their own

171 A cost benefit analysis by World Health Organisation (WHO) showed that each dollar invested in water and sanitation would yield an economic return of between $3 and $34 (Bartram et al. 2005) 172 Tap water supply is limited in places such as Kelantan (50.3%), Sabah (66.5%) and Sarawak (83.6%) (Institute for Public Health, 2008: 13).

197

deep tube wells because they prefer to do so or because there are no pipe water connections in their vicinity. In rural Penang, the total cost would be RM1,400 (The Star 22 January 2008). There is, of course, bottled water but, by one calculation, it costs 3,000 times more than piped water (Aini et al. 2007: 508). How, then, do the poor cope with their water needs?

Water theft is an option. That would be a survival strategy although there are no reliable records of the poor stealing water for daily consumption. Reported cases suggest as much, especially for poor urban dwellers who have no other viable alternatives. In the worst case scenario, similar to certain African situations, the poor must reduce water consumption or fetch water from public places (Grusky, 2001). Indeed, many local authorities in Malaysia provide common community stand pipes in poor areas and some welfare-oriented water providers, like the Penang Water Corporation, provide free water to the hard core poor.

In a way, the rural poor are better off than their urban counterparts. The rural water supply may not be as clean and safe, but the rural poor have easy access to well and river water. Ground water is abundant and usually located close to the surface. It takes only several meters of digging to reach surface water. Its quality may not be as good as deep tube well water, but it is safe to consume if it is first boiled. For now, the rural poor have ready access to water but rapid development in agriculture has created major threats of water pollution from the use of chemical fertilisers and pesticides. The rural poor also face periodic threats of flooding due to deforestation and uncontrolled surface runoff resulting from the expansion of agriculture in the highlands and water catchment areas.173 IV. Conclusion

The Malaysian state has transformed the three basic social services into fundamental instruments for development. Through recent major policy shifts, the state has integrated health, education and water services into mainstream development by aligning them to globalizing market forces of an unprecedented scale. Prior to globalisation, the three areas were considered ‘pure’ public domains the services in which were altruistically managed and delivered for the common good. To what extent have the policy shifts benefitted the poor?

There are two fundamental reasons any government will be challenged to

promote and maintain a healthy and productive population under rapid globalization. First, there is the constant concern with personnel, efficiency, facilities (technology) and comprehensiveness of coverage (cf. Sachs 2004). The prospect of higher income and better service conditions regularly entices health professionals from the civil service, leading to shortages of personnel and persistent deficiency of skills and knowledge. A follow-on outcome is the unequal distribution of personnel among existing health facilities and between geographical regions. Caring charges may be low and highly subsidised, and health facilities may be located within reasonable distances. Yet the poor and those in rural areas are still deprived of optimum health care, as if health care is not readily available and equitable quite typical of the failure of public health services in developing countries (Wagstaff 2002). 173 Reports from water samples taken from various parts of the country indicate that 94.5 per cent did not comply for total suspended solids, 94.5 per cent did not comply with standards for oil and grease and 29.7 per cent for E.coli (Chan, 2005)

198

Second, the problem may be as much behavioural as technical. Primary and ambulatory care is available at government and private facilities. Yet this does not ensure comprehensive access to care. Many Malaysians are wary of allophatic treatment because they lack full trust in the efficacy of modern medicine. The plurality of the existing care systems (allophatic, traditional and personal) does not necessarily help for it allows choices and preferences away from allophatic services. It is quite common to find people who seek hospital services as ‘care of last resort’. And near universal secondary education does not seem to have influenced this behaviour for the better. The failure to attract users to modern health care facilities is to some extent a product of the service policy. The focus has been on service development providing care as if health is a medical problem (Lantz et al 2007) rather than promoting what might be called pro-equity and pro-poor uses of the services. In such a situation, globalisation and the rise in pro-business health care services accentuate the inequitable features of the existing health care system. Quite prominent are the segregation between public and private health services and the health gap between rural and urban population (cf.Gauld et al. 2006; Casas-Zamora et al. 2004).

Unlike health, education is imbued with political and ethnic undertones. Health care facilities do not turn a patient away. But education services are fraught with ethnic divisions. Although there is no clear or official policy of ethnic separation, there is clear separation between Bumiputra children in national schools and non-Bumiputra children in vernacular and independent schools. The situation is compounded at higher education levels where, until very recently, a quota system was used to reserve places for Bumiputra places in public institutions of higher learning. Preferential access to education for Bumiputra children is a primary strategy to achieve the NEP objectives. Ultimately, the strategy is expected to promote equality of opportunity for the Bumiputra so that they may reach parity with other ethnic groups and equitably reap the benefits of development. Yet, an ethnic politics of education has produced more harm than good. First, the policy outcomes tend to recruit new Bumiputra entrants into the middle and upper classes thus strengthening the existing class structure. In contrast, academically weaker or non-performing Bumiputra children, particularly in rural areas, are stuck at the bottom of the social structure, creating major social divisions previously not present in Bumiputra society. Second, the limitation of places for non-Bumiputra children in higher education denies them the right to education. No doubt the rise of private education neutralises the political barrier to non-Bumiputra educational pursuits but this holds true only for the wealthy while poor non-Bumiputra are denied equal opportunities for education. Even the celebrated offering from the national educational loan fund does not eliminate the inequities. Consequently, education is so highly ethnicised and politicised that each ethnic group has set up, as it were, its own higher educational institution. Globalisation opens up greater opportunities for higher education by promoting private education. But, being neoliberal in origin, private education regulates accessibility according to affordability and retains an anti-poor class bias.

The provision of clean water, too, is a basic service provided at a nominal fee until very recently. Unlike education, water services have no ethnic or political associations: every Malaysian is an equal consumer. Since water resources are abundantly available, however, the population expects the state to provide the service with a minimum charge. The advent of globalisation changed that by turning water into a commodity and the service into a business. Elaborate state and private corporations emerged that made huge profits by raising tariffs, resulting in a fragmented service with different companies charging different tariffs. Civil society protested against the policy

199

shift and demanded a return to the status quo. Being non-ethnic, the protests were popular compelling the state to respond by embarking on a plan to centralise water services. Yet, even under state control, the cost of obtaining tap water supply can be beyond the reach of the poor, and pockets of the population, substantial number particularly in rural area, are not served. As clean water brings along economic, health and social benefits, the marginalised population is exposed to the risks of poverty, diseases and environmental hazards.

One might say all is not well with basic social services in Malaysia. There are many barriers to the equitable distribution of benefits from developments in health, education and water services. Instead of reducing inequities, the state has exacerbated them because its policy shifts benefit the rich more than the poor, and the urban more than the rural people. At the very least, the new policies accentuated class differences which, in the final analysis, make a mockery of the rights to equity if not equality. Privatisation may be routine for a globalised economy but it should not be so pervasive as to cast social services and social development in the same mould. Since globalisation has no immediate social mission to speak about (Mkandawire 2001), the developmental state, by moral responsibility, should have complemented the process by taking up greater role in welfare matters.

200

REFERENCES Aini, M. S., A. Fakhrul Razi, O. Mumtazah and J. C. Meow Chen. 2007. “Malaysian Households’ drinking water practices: A case study.” International Journal of Sustainable Development and World Ecology, vol.14, No.5, October, pp.503-510 Asian Development Bank (ADB). 2006. “Are Countries in Asia on Track to Meet Target 10 of the Millennium Development Goals?” Asia Water Watch 2015. Published jointly by the Asian Development Bank, United Nations Development Programme, United Nations Economic and Social Commission for Asia and the Pacific, and World Health Organization, www.adb.org/Documents/Books/Asia-Water-Watch/pdf. (accessed 24 April 2008). Anonymous. 2004. “Clean water alone cannot prevent disease.” The Lancet. Sep 4-Sep 10, vol. 364, Issue 9437. pg. 816, 1 pgs http://proquest.umi.com/pqdweb? did=690807331&sid=11&Fmt=4&clientId=27905&RQT=309&VName=PQD (accessed 1 May 2008) Bartram, Jamie, Kristen Lewis, Roberto Lenton and Albert Wright. 2005. “Focusing on improved water and sanitation for health.” The Lancet. Feb 26 – Mar 4, vol. 365, Issue 9461, 3 pgs http://proquest.umi.com/pqdweb?did=804282491&sid=10&Fmt= 4&clientId=27905&RQT=309&VName=PQD (accessed 1 May 2008). Brown, Graham K. 2007. “Making ethnic citizens: The politics and practice of education in Malaysia”. International Journal of Educational Development, vol. 27, pp. 318-330 Casas-Zamora, Juan Antonio and Said A Ibrahim. 2004. “Confronting Health Inequity: The Global Dimension.” American Journal of Public Health, vol. 94, No. 12, December, Health Module: pp. 2055-2058 Chan, Ngai Weng. 2005. Water Resources Management in Malaysia: NGO Perspectives. Paper presented at MENGO’s Sustainable Development Conference, 6-8 June. Kuala Lumpur. Checkley, William , Robert H. Gilman, Robert E. Black and Leonardo D. Epstein. 2004. “Effect of water and sanitation on childhood health in a poor Peruvian peri-urban community.” The Lancet. vol. 363, Issue.9403, January 10, p. 112 Chiu, Ya-Fang. 2000. “Educational Opportunities for Chinese in Malaysia”.International Journal of Educational Research. Vol. 33. pp. 585-591. Citizens’ Health Initiative. 1997. “A Citizens’ Health Manifesto for Malaysia”. Aliran, September 19th . http://pcdom.org.my/discforum/nview8 (accessed 27 January, 2008) Department of Statistics, Malaysia. 2000. Population and Housing Census of Malaysia: Education and Social Characteristics of the Population. CD Rom _____. 2004/5. Report on Household Expenditure Survey. CD Rom. _____. 2006. Social Statistics Bulletin, Malaysia. CD Rom.

201

Economic Planning Unit. 2004. Malaysian Quality of Life. Prime Minister’s Department, Kuala Lumpur. Food and Agriculture Organisation. 1999. Aquastat: FAO’s Information System on Water and Agriculture. http://www.fao.org/nr/water/aquastat/ countries/malaysia/ index.stm (accessed 10 February, 2008). Filmer, Deon and Lant Pritchett. 1999. “The impact of public spending on health: does money matter.” Social Science and Medicine. vol. 49, pp. 1309-1323. Gauld, R., Ikigami, N., Barr, M.D., Chinag T-L., Gould D., Kwon, S. 2006, Advanced Asia’s Health System in Comparison. Health Policy 79, 325-336. Government of Malaysia. 1971. Second Malaysia Plan 1971-1975. National Printing Department, Kuala Lumpur _____. 1976. Third Malaysia Plan 1976-1980. National Printing Department, Kuala Lumpur _____. 1981. Fourth Malaysia Plan 1981-1985. National Printing Department, Kuala Lumpur _____. 1986. Fifth Malaysia Plan 1986-1990. National Printing Department, Kuala Lumpur _____. 1991. Sixth Malaysia Plan 1991-1996. National Printing Department, Kuala Lumpur _____. 1996. Seventh Malaysia Plan 1996-2000. National Printing Department, Kuala Lumpur _____. 2001. Eighth Malaysia Plan 2001-2005. National Printing Department, Kuala Lumpur _____. 2006. Ninth Malaysia Plan 2006-2010. National Printing Department, Kuala Lumpur _____. 2008. Mid-Term review Ninth Malaysia Plan 2008. National Printing Department, Kuala Lumpur Gauld, Robin, Naoki Ikegami, Michael D. Barr, Tung-Liang Chiang, Derek Gauld and Soonman Kwon. 2006. “Advanced Asia’s health systems in comparison.” Health Policy. vol. 79, pp. 325-336. Grusky, Sara. 2001. “Privatization tidal wave: IMF/World Bank water policies and the price paid by the poor”. Multinational Monitor. vol. 22, Issue 9, September, 6 pgs, http:// proquest.umi.com/pqdweb?did=81567887&sid=9&Fmt=4&clientId=27905&RQT=309&VName=PQD. (accessed 1 May 2008).

202

Institute of Public Health, Ministry of Health, Malaysia. 1997. National Health and Morbidity Survey 1996. Public Health Institute, Kuala Lumpur Institute for Public Health, Ministry of Health, Malaysia. 2008. National Health and Morbidity Survey III: General Findings. National Institute of Health, Kuala Lumpur Johnson, David and Frances Stewart. 2007. “Editorial: Education, ethnicity and conflict”. International Journal of Education Development. vol. 27, pp. 247-251. Joseph, Cynthia. 2005. “Discourses of Schooling in Malaysia: Pedagogical practices and ethnic politics.” Australian Journal of Education, vol. 49, No. 1, pp. 28-45 Kamaruzaman Saleh and Mohamed I .M. Ibrahim. 2005. “Are essential medicines in Malaysia accessible, affordable and available?”. Pharm World Sci . vol.27, pp. 442–446 King, Kenneth, Simon McGrath and Pauline Rose, P. 2007. “Beyond the basics: Education and training out of poverty.” International Journal of Educational Development, 27, pp. 349-357. KPJ Healthcare Berhad. 2006. Annual Report KPJ. Lantz, Paula M., Richard L.Lichtenstein and Harold A. Pollack. 2007. “Health Policy Approaches To Population Health: The Limits Of Medicalization.” Health Affairs. vol. 26, No. 5, September/October, pp.1253-1257. Ministry of Education. 2004. The Development of Education: National Report of Malaysia. http://www.ibe.unesco.org/International/ICE47/English/Natreps/reports/ malaysia.pdf. (accessed 30 January 2008) Ministry of Energy, Water and Communication, Malaysia. 2006. National Water Supply: Policy and Action Plan. Presentation for multi- stakeholders planning workshop 3rd August. http//www.nahrim.gov.my/klik_khas/WEB-IWRM_2000_papers/ SESSION%2002/presentation%2002.pdf. (accessed 6 May 2008). Ministry of Health, Malaysia. Annual Report. Various years, 1980–2006 Ministry of Women, Family and Community Development, Malaysia. 2005. Statistics on Women, Family and Social Welfare. Cd Rom _____. 2007. Statistics on Women, Family and Social Welfare. http://www.kpwkm.gov.my. (accessed 16 May 2008). Marmot, Michael. 2005. “Social determinants of health inequalities.” The Lancet. vol. 365 March 19, Health Module, pp. 1099-1104 _____. 2006. “Harveian Oration: Health in an unequal world.” The Lancet, vol. 368 December 9-December 15, Health Module, pp. 2081-2094 Mehrotra, S. 2007. ‘Eliminating Human Poverty’, Book Launch and Discussion, Monday 2 July, 1.00-2.30 pm, http://www.odi.org.uk/events/human_poverty_07/index.html, accessed on 18 November 2007

203

Mkandawire, Thandika. 2001. Globalisation, Equity and Social Development. Keynote Address: Annual Conference of South African Sociological Association, Pretoria, July Netto, Anil. 2005. “Why privatise water?” Aliran Monthly. Vol. 25 No. 2, pp. 2-7 _____. 2005. "Water everywhere but soon it'll be too expensive to drink." Malaysia Today, 12 March 2005 Ness, G.D. 1964. “Economic Development and Goals of Government.” In Wang Gungwu (ed). Malaysia: A Survey. Donald Moore Ltd. Singapore. Nordtveit, Bjorn Harald. 2007. “Poverty alleviation and integrated service delivery: Literacy, early childhood development and health.” International Journal of Educational Development. doi:10.1016/j.ijedudev.2007.10.004 Penang Water Corporation. 2004. History of Water Supply in Penang http://www.pba.com.my/PBAHis.html, (accessed on 11 February, 2008). Psacharopoulos, George. 2006. “World bank Policy ion education: A personal account”. International Journal of Educational Development. 26, 329-338. Rahmah Ismail and Zulridah Mohd. Noor. 2007. “Gender Wage Differentials in the Malaysian Manufacturing Sector”. IIUM Journal of Economics and Management . vol. 13, no.2 (2007): 119-137 Rohaizat Yon. 2004. “Financing Health Care in Malaysia: Safety net for the sisadvantaged groups including pensioners, elderly people, the poor and the disabled.” NCD Malaysia, Vol. 3, No. 3, pp.43-46 Rozita Halina Hussein. 2000, “Financing Health Care Through General Taxation in Malaysia”. In Proceedings of International Conference on Evidence-based Practice: Towards Evidence-based Policy Making in Health Sector Development, Kuala Lumpur, 4-6 September _____. 2002. National Health Accounts in Malaysia: Developing a sustainable system. Power point presentation at WHO Bi-regional NHA Meeting, Bangkok, Thailand, 26th June. RUB. 2007. Annual Report. Sachs, J.D. 2004. “Health in the developing world: Achieving the Millenium Development Goals,” Bulletin of the World Health Organization, vol. 82 (12), December, pp. 947-949. Santhiram, R. 1999. Education of Minorities: The case of Indians in Malaysia. Child Information, Learning and Development Centre, Petaling Jaya, Malaysia. Santiago, Charles., 2005. “Stop water privatisation: Reform the public sector.” Aliran Monthly, vol. 25, No. 4, pp. 8-11

204

Sarfati, Hedva. 2006. “East Asian Welfare Regime in Transition: From Confucianism to Globalisation.” Relations Industrielles. Vol 61. No.3, pp. 540-545 Shepard, Donald, S., William Savedoff and Phua Kai Kong. 2002. Health Care Reform Initiatives In Malaysia. Report of a consultation with the Planning and Development Division, Ministry of Health, Malaysia, 16 October Sivalingam, G. 2007. Privatization of Higher Education in Malaysia. Forum on Public Policy, A Journal of the Oxford Round Table, Winter, pp.1-27. http://www.forumonpublicpolicy.com/archive07/sivalingam.pdf , accessed on 24 Feberuary 2008. Siti Zuraidah Mahmood, Ami Fazlin Syed Mohamed, Tahir Aris, Siti Haslinda Mohd Din, Ida Farah Ahmad, Zulkarnain Abdul Karim, Zakiah Ismail and Nik Mohd. Nizam Nik Hassan. n.d. Pattern of Traditional and Complementary Medicine Utilisation by Malaysian Public. Herbal Medicine Research Centre; Institute for Health System Research; Environmental Health Research Centre, Institute for Medical Research, Kuala Lumpur. Mimeo. Snodgrass, Donald R. 1980. Inequality and Economic Development in Malaysia. Oxford University Press, Kuala Lumpur. SPLASH (Syarikat Pengeluar Air Sungai Selangor Sdn Bhd). 2008. Water Facts. http://www.splash.com.my/. (accessed 15 May 2008) Staton, Donna M. and Marcus H. Harding. 2004. “Protecting Child Health Worldwide.” Pediatric Annals. Vol. 33, Issue 10, October, pp. 647-655. Starfield, B. 2000. “Health and Healthcare in Changing Environments: The Malaysian Experience”, paper presented to a work in progress seminar on “Primary care, Equity and Health in an International Context”, Kuala Lumpur 22nd and 23rd April . http://pcdom.org.my/phc/stard2. (accessed 21 January 2008). Steinberg, Ted. 2004. “Big is ugly: Corporate Enclosure and the Global Water Supply.” Technology and Culture. vol. 45, Issue 3, July: 6pgs http://proquest.umi.com/pqdweb? did=715164521&sid=6&Fmt=3&clientId=27905&RQT=309&VName=PQD. (accessed 1 May, 2008). Subrahmanian, Ramya. 2005. “Gender equality in education: Definitions and measurements”. International Journal of Educational Development. vol. 25, pp. 395–407. Tilak, Jandhyala B.G. 2007. “Post-elementary education, poverty and development in India.” International Journal of Educational Development, 27, pp. 435-445. United Nations. 2003. The UN World Water Development Report (1), UNESCO and Berghan Books. _____. 2006. The UN World Water Development Report (2). UNESCO and Berghan Books.

205

United Nations Development Programme (UNDP).2005. Malaysia in Achieving Millennium Development Goals: Success and Challenges, United Nations Country Team, Malaysia. _____. 2008. “Human Development Report 2007/2008: Malaysia: The Human Development Index – going beyond income.” http://hdrstats.undp.org/countries/ country_fact_sheets/cty_fs_MYS.html, accessed on 1 June, 2008. Wade, Robert H. 2006. “Questions of Fairness.” Foreign Affairs. vol. 85, Issue 5, September/October, pg. 136, http://proquest.umi.com/pqdweb? retrievegroup=O&index=7srchmode=5&vins… (accessed 5 June, 2008). Wagstaff, Adam. 2002. “Poverty and health sector inequalities.” Bulletin of the World Health Organisation. vol. 80, (2), pp. 97-105 Water Industry Guide. 2003. Water Supply Achievements and Prospects (20001-2003), Water Association Malaysia, Kuala Lumpur Wedgwood, Ruth. 2007. “Education and poverty reduction in Tanzania.” International Journal of Educational Development, 27: 383-396 World Health Organisation. 2006. World Health Report 2006. by the World Health Organisation Wong, R.H.K. 1964. “Education and Problems of Nationhood.” In Wang Gungwu (ed). Malaysia: A Survey. Donald Moore Ltd. Singapore. World Bank. 1993. World Development Report 1993: Investing in Health. Oxford University Press. New York .

206

CHAPTER 6

Organized Groups, Development Strategies and Social Policies

Francis Loh Kok Wah

This chapter examines the strategic interactions of organized groups and state actors in policy-making that have a bearing on development strategies, social policies and poverty. The organized groups include workers’ unions, organized business groups, civil society organizations (including non-governmental organizations or NGOs), and political parties, specifically those belonging to the Barisan Nasional (BN) ruling coalition.

After a discussion of the Malaysian political system which will at relevant points refer to socio-economic restructuring under the New Economic Policy (NEP, for which see Chapter 1), this chapter will investigate the institutional arrangements circumscribing the interactions of the organized groups with state actors. The impact of such organized groups on policymaking on social development matters will next be discussed. A final section investigates how the interests of unorganized poor groups are being represented and catered for by the political parties and the NGOs. I. State domination of the political system

From independence in 1957 to 1969, Malaysia was ruled by the Alliance Party, a multi-ethnic coalition of government that comprised the United Malays National Organisation (UMNO), the dominant partner, the Malaysian Chinese Association (MCA), and the Malaysian Indian Congress (MIC). Nominally, it practiced a Westminster system of government that held federal and state elections regularly. For many observers, Malaysia was an example of consociationalism wherein political elites of the various ethnic groups reached consensual power-sharing arrangements.

In reality, and in spite of regular elections and parliamentary rule, a strong state dominated by the executive has been in place since independence. However, its control of civil society was achieved not through the use of brute force or the suspension of the constitution or elections, but through coercive legislation passed by Parliament. The most important consideration in this regard was how the British expanded and consolidated the Malaysian (then colonial) state quickly as a result of the communist uprising, euphemistically termed the Emergency (1948–1960). It was only with the advent of independence that a set of participatory governmental institutions was introduced by the British from above. The state’s coercive powers provided for under the Emergency Regulations were then amended and incorporated into the Independence Constitution and other laws for the state’s use in ordinary times after independence. Ironically, the Malaysian nationalists worked hand in glove with the British to expand and consolidate the national state, ensuring the defeat of the communist insurrection.

The post-independence executive used these strong foundations to further reform the state to serve its own political ends. Through promulgation of new laws and amendments to these new laws and Constitution, the executive ensured uninterrupted control and domination of the Malaysian state. Consequently, very few independent

207

organizations that are capable of advocating the rights and interests of civil society in a sustained fashion have emerged.

The absence of consensus outside the Alliance leadership and an economic slowdown in the late 1960s contributed to worsening ethnic relations that culminated in the worst-ever incident of communal riots in May 1969. The riots led to the suspension of parliamentary rule. The National Operations Council – largely drawn from the ruling Malay elites in UMNO and the upper echelons of the administrative and security forces, also dominated by Malays – ruled for almost 21 months. Several important changes to the original consociational arrangements, geared toward the promotion of Malay interests, were introduced before parliamentary rule was restored in early 1971.

First, the political elite expanded the Alliance multi-ethnic ruling coalition to include the erstwhile opposition parties and renamed it the Barisan Nasional (BN, National Front). Apart from UMNO, MCA and MIC, the coalition includes eleven other smaller parties. At the same time, a shift occurred from participative to executive institutions. After amendments to the Constitution and to the Sedition Act, certain ‘sensitive issues’ were declared to be beyond the bounds of public discourse. These issues included the special rights of Malays, the position of traditional rulers as heads of state, Malay as the national language, and Islam as the official religion, on the one hand, and the citizenship rights of non-Malays, on the other.

Second, the government undertook various moves to promote a common national identity. These included the introduction of a National Cultural Policy (which emphasized Islam and the cultural attributes of the majority indigenous Malays as the essential bases of the Cultural Policy); the belated implementation of the National Language (Malay) and National Educational policies (including the progressive use of Malay as the sole medium of instruction in secondary schools and universities beginning from 1971), which had been passed in the 1960s; and the pronouncement of the Rukunegara, the national ideology based on a set of five universal principles.

Third, the government formulated and launched the NEP (1971–1990) as its principal policy response to the May 1969 communal riots. The objectives of the NEP were to deal with Malay poverty and resentment of inter-ethnic income and wealth inequalities, and with the ethnic division of labor inherited from colonialism that favored the more urbanized non-bumiputeras and discriminated against the rural bumiputeras. II. The NEP, rapid growth and restructuring society

The NEP was associated with the ‘Outline Perspective Plan (OPP) for 1971–1990,’ which proposed poverty eradication regardless of ethnic group (the poverty rate was especially high among rural bumiputeras) and the increased share of corporate equity for the bumiputera from 2.5 per cent in 1970 to 30 per cent by 1990. Hence began a massive affirmative action program favoring bumiputeras. Foreign domination of the economy, which in 1970 accounted for 60.7 per cent ownership of equity in the corporate sector, was also to be reduced drastically.

The BN government’s successful management of the economy, including its adaptation to the global market economy, no doubt contributed towards Malaysia’s emergence as a second-generation newly industrialized country. Through a series of

208

Five-Year Plans, economic development and the NEP goals were vigorously pursued. Malaysia's average real GDP growth was 7.6 per cent during 1970–80, slowing down to 5 to 6 per cent during 1981–85. Due to falling commodity prices including that of petroleum, a recession set in stalling economic growth during 1986–87. However, the growth rate picked up again averaging 8 to 9 per cent from 1988–95. This growth was facilitated by the fortuitous discovery of oil (including Liquefied Natural Gas) and high rates of foreign direct investment (FDI) especially following the Plaza Accords, 1985. Among others, the FDI contributed towards Malaysia’s emergence as the regional hub for the global electronics and electrical industries.

In particular, the manufacturing sector has grown: from 13.4 per cent of GDP in 1970, to 20 per cent in 1980, to 27 per cent in 1990, to 33.4 per cent in 2000 (Table 1). Manufacturing employment as a percentage of total employment has also increased from 11.1 per cent in 1970, to 15.7 per cent in 1980, to 19.5 per cent in 1990, to 25 per cent in 1995. Overall, employment expanded steadily rising from 3.34 million in 1970 to 4.84 million in 1980 to 6.69 million in 1990, to 10.9 million in 2005. The unemployment rate declined from 7.4 per cent in 1970, to 5.7 per cent in 1980, rose to 8.6 per cent in 1987, dropped to 5.1 in 1990 and even lower during the 1990s. In 2000 it was estimated at 3.1 per cent and in 2005 at 3.5 per cent (Table 2). An estimated one million foreign workers (legal as well as illegal), mostly unskilled and semi-skilled, were further employed in the country by 1997/98 when the regional financial crisis occurred.

Table 1 GDP by Industry of Origin (in percentages) 1970–2000

Sector/Year 1970 1980 1990 2000 Agriculture, forestry, livestock and fishing 30.8 22.8 18.7 8.7 Mining and quarrying 6.3 10.0 9.8 6.6 Manufacturing 13.4 20.0 26.9 33.4 Construction 3.9 4.6 3.6 3.3 Services* 41.9 39.9 42.4 52.6 Import duties less imputed bank services charges 3.7 2.7 –1.4 – 4.5

GDP 100.0 100.0 100.0 100.0 * includes government and non-government Source: Eighth and Ninth Malaysia Plans

209

Table 2

Employment by Sector, 1970 – 2005 (‘000) 1970 1980 1990 2000 2005Agriculture, forestry and fishing 1,776.0 1,800.5 1,738.0 1,423.0 1,405.7Mining and quarrying 87.3 62.2 37.0 41.7 42.7Manufacturing 301.0 748.8 1,333.0 2,565.8 3,132.1Construction 91.0 269.9 424.0 752.2 759.6Finance, insurance, business services and real estate

411.0* 140.7 258.0 500.2 732.3

Transport, storage, and communication

133.0 189.5 302.0 461.6 631.2

Government services 398.0 644.3 850.0 981.0 1,052.8Other services 143.0 979.3 1,744.0 2,549.1 3,138.4TOTAL 3,340.0 4,835.2 6,686.5 9,274.6 10,894.8Unemployment Rates (%) 7.4 5.7 5.1 3.1 3.5*figure represents finance, insurance and business services Source: Jomo (1990: 38–43); Jomo, Khoo and Chang (1996: 75, 82); Eighth and Ninth Malaysia Plans

In fact, following the 1985–86 recession, Malaysia had introduced economic liberalisation and privatisation policies to adjust its economic policies in line with the needs of the global market economy. During the late 1980s, the NEP was virtually held in abeyance. Significantly, the guidelines for foreign equity ownership in manufacturing were liberalized in July 1985. The Industrial Coordination Act (ICA), already amended in the late 1970s, was amended again in December 1985 and in again in late 1986 to make it easier for industrialists to invest in new projects or to expand or diversify their existing investments. In May 1986 the Promotion of Investments Act provided additional tax incentives for manufacturing, agriculture and tourism. The local Chinese entrepreneurs, too, were courted to stimulate the economy (Jomo, Khoo and Chang 1996: 92–94).

Apart from deregulation, the government also adopted privatization policies which it hoped would further contribute towards growth. Privatisation began with new projects like the construction of the north-south toll highway and highway interchanges, and the first commercial television station, TV3. Older, relatively successful public enterprises like the Malaysian Airlines System (MAS ) and the Malaysian International Shipping Corporation (MISC ) were privatised next.

The National Development Policy (NDP, 1990–2000), which replaced the NEP, continued with the twin objectives of poverty eradication and restructuring within the context of economic growth. The goal of achieving at least 30 per cent bumiputera ownership and control of corporate equity associated with the earlier NEP remained, but no specific time frame for its realization was set. Henceforth, attention was focused on the qualitative aspects of bumiputera participation while non-bumiputera corporations and entrepreneurs were encouraged to co-operate with their bumiputera counterparts. Continuing the strategy adopted for economic recovery and growth since the mid-1980s, the private sector was identified as the engine of economic growth for the duration of the NDP. Thus privatisation was undertaken with even greater urgency in the 1990s.

Major infrastructural projects like the construction of the new Kuala Lumpur International Airport (KLIA), the KLIA Express linking the KLIA to Kuala Lumpur city centre, the light rail rapid transit system within Kuala Lumpur, a new bridge – the Second Link – with Singapore, the new administrative centre in Putrajaya, etc were awarded to the private sector. Many statutory bodies providing basic services were also

210

privatized: Telecoms Malaysia, the National Electricity Board, the Malayan Railways, and other bodies supplying water, treating sewerage, collecting rubbish, etc. By 1995, the number of privatization projects that had been implemented totaled 374. The government claimed that these projects had saved it RM72.7 billion in capital expenditure and removed almost 97,000 workers from the government payroll. Privatization projects under the Seventh Malaysia Plan 1996–2000 included the Bakun Hydro-electric Power project, the money-losing Perwaja Steel Bhd, Bank Bumiputera (the second largest bank in the country), and several coastal highway projects, ports and regional airports. Additionally, corporatization (a variation of the privatization theme which allows for administrative autonomy without sale of government assets) of the major hospitals, the public universities, the Public Works Department, etc was also launched.

On the eve of the 1997 financial crisis, Malaysia had virtually reduced the index of (absolute) poverty to about 4 per cent, down from 49 per cent in 1970 and 17 per cent in 1990. Increasing numbers of Malays had also moved out of lower-paying into higher-paying occupations. In part, this was facilitated by greater access to higher education through the provision of government scholarships and a system of quotas for entrance into tertiary-level institutions, higher rates of Malay concentration in urban areas, and expansion of the public sector especially for the first 15 years of the NEP. Consequently the bumiputera share of corporate equity increased: according to official estimates from 1.5 per cent in 1969 to 20.6 per cent in 1995 (Malaysia 1991 and Malaysia 1996: 86).

Fed up with the waste, inefficiency and corruption associated with the public sector, a large section of the Malaysian public, especially the middle classes welcomed the policy shift. Anticipating opportunities for themselves, businessmen – bumiputera, local Chinese as well as foreigners – also welcomed privatisation. With such opportunities being made available to the private sector, and with such rapid growth occurring due to this turn to the market, the business and middle-classes have become enamoured with both the market and the BN government. It was this ability to switch from the public sector as the engine of growth from 1971 to 1985, to the private sector beginning from the late 1980s that sustained Malaysia’s economic growth over three decades.

Meanwhile, due to rapid industrialization and the overall economic growth that occurred during 1970–2000, Malaysian society also experienced considerable transformation. A new business class emerged while the middle and industrial working classes consolidated. No doubt, it facilitated the successful implementation of the NEP. The switch to neo-liberal policies also catered to the economic interests of the business class. And whereas previously those involved in the modern sectors of the economy were overwhelmingly non-Malays, nowadays, as a result of the NEP, large proportions of the business, middle and working classes include bumiputeras as well.

By adding the total numbers of people in professional and technical work, administration and management, sales and clerical work, and half of the total numbers engaged in services-related occupations, Saravanamuttu (1992: 48–49) estimated that the middle class comprised just under 36 per cent of the total gainfully employed in 1988, up from 31 per cent in 1980. On the same basis of measurement, the middle class apparently accounted for 43.2 per cent of total gainfully employed in 2000 (Table 3). Although one might dispute how Saravanamuttu defines his middle class (‘middle classes’ might be more useful) and his estimate of its size, there is no disputing that a multi-ethnic middle class of substantial size has emerged (Abdul Rahman 1995, 2001).

211

Table 3 Employment by Major Occupational Group (%) 1957–2005

Occupational group 1957 1970 1980 1985 1990 1995 2000 2005 Professional & technical 2.8 4.8 6.0 7.5 8.8 9.9 11.0 12.1Administrative & managerial

1.2 1.1 1.1 2.3 2.4 3.2 4.2 5.0

Clerical workers 2.9 5.0 7.3 9.7 9.8 10.9 11.1 11.2Sales workers 8.6 9.1 9.8 11.1 11.5 10.9 11.0 11.3Service workers 8.6 7.9 8.7 11.4 11.6 11.1 11.8 12.4Agriculture workers 56.4 44.9 38.7 30.6 28.3 20.1 18.1 17.1Production workers 18.9 27.3 28.5 27.3 27.6 33.9 32.8 30.9Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Employed persons (‘000)

2,126 2,850 4,817 5,625 6,686 7,999 9,271 10,894

Source: Eighth and Ninth Malaysia Plans

Consequently a dramatic restructuring of the ethnic division of labour inherited from colonialism has occurred. No longer were a majority of the bumiputera characterised by persistent rural poverty. Nor was the ethnic socio-economic imbalance as significant as before. Table 4 indicates that the percentage of bumiputeras have increased considerably among the professionals and technical workers, administrative and managerial workers, and clerical, sales and service workers.

Table 4 Distribution of Occupation by Ethnic Group (%) 1970–2000

Bumiputera Chinese Indian Others* Occupational group 1970 2000 1970 2000 1970 2000 1970 2000

Professional & technical 47.0 63.9 39.5 25.8 10.8 7.6 2.7 2.7 Administrative & managerial 24.1 37.0 62.9 52.3 7.8 5.5 5.2 5.2 Clerical workers 35.4 56.8 45.9 32.9 17.2 8.6 1.5 1.7 Sales workers 26.7 37.3 61.7 49.8 111 6.8 0.4 6.1 Service workers 44.3 57.7 39.6 21.8 14.6 8.5 1.5 12.0 Agricultural workers 72.0 61.2 17.3 10.3 9.7 6.9 1.0 21.6 Production & transport workers 34.2 44.7 55.9 33.8 9.6 10.0 0.3 11.5 Total 51.8 51.5 36.6 29.7 10.6 8.3 1.0 10.5 * includes non-citizens Source: Source: Fourth and Eighth Malaysia Plans III. Institutional arrangements on developmental matters

The principal organizations in Malaysia are organized along ethnic lines. Our focus is on the economically based organizations, namely the trade unions, employer organizations and business associations. These organizations happen also to be more multi-ethnic in composition although still subjected to ethnic considerations as the following discussion will indicate. The trade unions

The trade union movement started during colonial times when it was aligned with left-wing movements and the communist party. At that time, the objectives were largely political – to fight colonialism – rather than to articulate the economic interests of the working class per se. This confrontation between the left-wing movement and the

212

British colonial government intensified immediately after World War II when the living standards were lower than pre-war levels due to food shortages, scarcity of employment opportunities, and low wage levels even for those who were gainfully employed. Add to this the general mood of post-war anti-colonialism not only in British Malaya but throughout the region. Consequently, labour was radicalized and mobilized in support of the anti-colonial movement. Hence when a few British planters were murdered in Sungai Siput, Perak, by communist guerillas, the British responded by declaring a state of Emergency in 1948, apparently to pre-empt a communist insurrection. As part of this war against the communists, the British introduced the coercive Emergency Regulations which facilitated the arrests of communists and suspects, the suspension of civil liberties and political rights, banishment of radicals to China, mass resettlement of more than one million rural settlers, the imposition of curfew, strict control of food, medical and other supplies, etc. (Loh 1988: 102–30). Consequently, the radical unions, too, were repressed. The central organization – the Pan-Malaya Federation of Trade Unions – was proscribed, its principal leaders incarcerated and/or banished, and many of its affiliates, disbanded (Gamba 1962 and Stenson 1970).

It was only after the British had reasserted their political control and gained the upper hand against the communists that the Emergency Regulations were lifted on a district-by-district basis. Meanwhile, the British also fostered the formation of a multi-ethnic coalition of moderate nationalist leaders who subsequently proclaimed Independence in 1957. In 1960 the state of Emergency was officially ended and the usual civil liberties were restored. By this time, due to the outbreak of the Korean War, the prices of rubber and tin, then Malaysia’s two main exports, rose dramatically in the international market, spurring economic recovery.

A part of the plan to defeat the communists and hand over power to the moderate nationalists was the sponsorship of ‘responsible’ trade unions. With the aid of British advisers, the Malayan Trade Union Council (later Congress, MTUC) was formed in 1950. The British also promoted the amalgamation of several small unions in 1954 to form the National Union of Plantation Workers (NUPW), which affiliated itself with the MTUC. To cater for public sector employees, the British further fostered the formation of the Congress of Unions of Employees in the Public and Civil Service (CUEPACS) in 1957. With such origins it is not surprising that this second phase of the labour movement led by the MTUC and CUEPACS was characterized by collaboration with the government, first the British and then the independent government. Nonetheless, the 1960s witnessed a wave of radical unionism. One part of this radicalism centred on the demand by public sector workers in the early 1960s for better working conditions including the introduction of a monthly-wage scheme. In pursuit of this goal, the Railway Workers Union of Malaya (RUM) went on strike for 23 days in 1962. Between 1963 and 1965, laboratory assistants, x-ray workers, hospital assistants, postal workers, firemen attached to the municipalities as well as the Fire Department and Forest Department workers either ‘worked to rule’, went on strike, or threatened to go on strike. The spate of labour activism was only arrested with the promulgation of the Essential Regulations, as will be discussed later, and the government’s agreement to grant monthly wages to most government servants.

The second part of this radicalism involved plantation workers who came under the influence of the leftist Labour Party and launched unions which were independent of the NUPW. However, new curbs and controls were soon imposed on these radical unions by the newly independent and conservative Alliance government. The net effect was the emasculation of this new wave of labour militancy. Many leaders of the Labour

213

Party and the radical unions affiliated to it were incarcerated for long periods under the Internal Security Act (ISA) (Ramasamy 1994).

In this regard, the trade union movement today might be regarded as a third phase of the labour movement. Compared to the earlier two phases when the labour movement appeared to be on the upswing, the movement today appears to be on the wane, although the labour force has grown in size. As well, unions today are more focused on bread and butter issues. This is evident in the MTUC’s ‘Langkawi Declaration 1997’, for instance, which highlights the importance to ensure socio-economic progress for workers and for labour to participate in national development plans. To these ends the MTUC called on the government to provide low-cost housing for workers, eradicate poverty via a minimum wage policy, provide training for workers in the use of new technology, etc. The Declaration also stressed that the labour movement could not be divorced from politics by which was meant the right of unionists to participate in political parties and to associate with them, including opposition parties, during elections. In fact, in an earlier declaration, ‘Labour’s Struggle towards 2000’, adopted in 1990, the MTUC had taken the stand to support political parties which were prepared to endorse its struggle for improved working conditions, and the repeal of coercive labour regulations. Even so, unlike its counterparts in the earlier phases, the labour movement in this third phase was more inclined to advocate for workers’ rights via the formal electoral process and parties than via strikes and other industrial actions to achieve their goals.

No doubt, the de-politicization of the unions was a consequence of the government’s use of harsh laws like the Trade Unions Act, Societies Act, the Industrial Relations Act and the Internal Security Act to emasculate the labour movement. These laws were regularly amended during the 1970s, usually after incidences of labour unrest, and especially in 1980 coinciding with the policy to industrialize and to ensure a more ‘docile’ work force, in order to attract foreign investors to Malaysia. Consequently, researchers like Jomo and Todd (1994) have observed that the government has become more unsympathetic, if not hostile to labour. This period marked Dr Mahathir’s ascendancy as prime minister whose views on labour has been well documented by Khoo (1995). In the following section, I shall first elaborate on these harsh laws, then discuss the internal problems of the unions, and finally, explore the inability of the trade union movement to adapt itself to the changing character of the labour force which was becoming increasingly segmented. The coercive laws

The original law circumscribing the affairs of the trade unions and union federations was the Trade Unions Ordinance 1959, which was based on the Trade Union Enactment 1940, a colonial-style law introduced to curb labour militancy. Under both the 1940 and the 1959 laws, general labour unions (where membership is open to all workers irrespective of type of occupation) are outlawed. Unions can only be formed for workers in ‘similar trades, occupations or industries’, the definition of ‘similar’ being determined by the Registrar of Trade unions (RTU).

Under the Essential (Trade Unions) Regulations, first promulgated in 1967 following the ‘Confrontation’ with Indonesia, new curbs were imposed on labour. Ostensibly in the interest of national security, the Regulations limited labour’s right to strike in a wide range of ‘essential services’ and proscribed industrial action among government employees. The Minister of Labour was empowered ‘to intervene or

214

conciliate in any dispute, and to compulsorily refer any unsettled dispute for binding arbitration even though the parties were unwilling or had not sought the Ministry’s intervention’. Under the Regulations, any industrial action by a union had to be endorsed by a secret ballot of two-thirds of its members affected by any strike action. In addition, the Registrar was given sweeping discretionary powers to de-register or to refuse to register a union.

The Trade Unions (Amendment) Act 1971 reduced the collective bargaining power of labour by inserting the ‘management prerogative’ clause, prohibiting unions from raising any bargaining demand on the promotion, internal transfer, recruitment, retrenchment, dismissal or reinstatement of an employee, including the assignment or allocation of duties or specific tasks to an individual. Accordingly, Article 135 of the Constitution was amended to enable the government to terminate the service of an employee in the public sector, if deemed to be in the public interest, without giving any reason, and to deny the concerned employee the right to seek reinstatement, which is clearly in contravention of natural justice.

The provisions contained in the Essential Regulations and the 1971 amendments were consolidated in the Trade Unions Act (TUA) 1980 and amendments to the Industrial Relations Act (IRA) in 1980 and 1983. Significantly, the consolidation occurred following the historic Malaysian Airlines dispute of 1978–79 which saw the arrest of several active unionists under the ISA. In the new TUA, the powers of the Registrar were increased and clearly spelled out. Among others, the Registrar could decide whether to recognize or reject a particular union; to allow or disallow a union to go on strike after examining the results of a compulsory secret ballot calling for a strike; or to suspend any union (for up to six months), or to remove any executive member of a union deemed to have broken the law; etc. The Registrar further monitored the unions to ensure that no officer of a political party could hold office in a trade union, and that no union funds were used for political objectives (Jomo and Todd 1994). Similarly, the IRA clearly stated that while strikes are legal, a union which intended to go on strike had to inform the Ministry of Human Resources of its intentions before any industrial action is taken. Meanwhile, the Industrial Relations Department may mediate in the dispute between the union and the employer. Should the Department fail to settle their dispute, the Ministry had the power to refer it to the Industrial Court. Pending a Court decision on the dispute, the employer and the employees are prohibited from taking follow-up actions.

Moreover, as an incentive to attract multinational corporations to invest in Malaysia’s electronics industry located in the Free Trade Zones, there were provisions in the Pioneer Investment Act disallowing the formation of trade unions in industries accorded pioneer status. Consequently, despite its emergence as a major producer of electrical and electronics component parts industry in the region, Malaysia continued to disallow the formation of an industry-wide electronic workers union.

Indeed, the Electrical Industry Workers Union (EIWU) had attempted to organize electronics workers as early as 1974. However, their attempt was thwarted when the RTU ruled that the scope of the EIWU was limited to electrical workers involved in producing finished goods, not electronic workers producing electronic component parts. When the MTUC submitted an application to form a National Union of Electronics Workers, the Registrar kept the application in cold storage for a record 12 years before it rejected the application. Following an appeal to the Minister of Labour, the decision was reversed in September 1988, but it was almost immediately retracted

215

by the Minister (apparently due to pressure from the MNCs, especially the American MNCs in the FTZ, that threatened to relocate if the union had been allowed to be established) (Jomo and Todd 1994: 154). Consequently, the Minister pronounced that only Japanese-style ‘in-house unions’ could be formed.

Although several in-house unions have been established in the electronics sector since 1988, workers trying to set up such in-house unions have been subjected to much harassment by their employers. The most dramatic of these episodes was the attempt to set up such a union among the workers in an American electronics firm; in response, the firm changed its name five times to avoid dealing with and recognizing the union. Meanwhile the union leaders and members were victimized and intimidated. Fifteen years later, this matter has not been resolved. Obviously existing laws and the legal process do not protect the interests of workers adequately174. Internal problems at leadership level

A second factor contributing towards the weakness of the trade union movement are its internal problems at the leadership level. As mentioned, there exist two major central organizations – the MTUC and CUEPACS – which bring together the unions. The MTUC has affiliates from both the public and private sectors while only public service unions are affiliated to CUEPACS. In 2002, the MTUC had 235 affiliates, 192 being from the private sector and 43 from the public sector. About the same time, 114 unions were affiliated to CUEPACS. Both federations are officially recognized as ‘national trade unions’ which means that they sit in the government-sponsored National Wage Councils, the National Labour Advisory Council, the Human Resources Development Board, etc, that is, they are invited to meetings concerned with labour issues, as well as deliberations on government policies affecting labour.

In general, relations between the two federations have been cordial. However, their relations soured during the 1980s when Zainal Rampak and V. David, who were closely associated with the opposition party Democratic Action Party, were respectively President and Secretary-General of MTUC. Taking the cue from Prime Minister Dr Mahathir Mohamad, the CUEPACS leaders accused the MTUC of being ‘involved in politics’. Consequently, eight CUEPACS affiliates including the NUTP, RUM and the Malaysian Technical Services Union withdrew from the MTUC. However, when a new set of union officials (with A Ponniah at the helm) took over CUEPACS, the two federations cooperated again, and the unions which had withdrawn rejoined the MTUC. Following the resolution of their differences, a new central organization, the Malaysian 174 Although the union was officially registered in January 1989, after a majority of workers had opted to join it, the company management refused to recognize the union. Consequently the matter had to be referred to the Industrial Relations Department. Meanwhile, the leaders and members were victimized and intimidated while the American company changed its name five times in the following years. Although the union was finally recognized by management, the 24 workers actively involved in setting up the union were emplaced in a deserted building all on their own with no work to do. The company to which the union was affiliated ceased operations officially following a change of name of the company. On that ground, the services of these union activists were terminated in September 1990, whereupon the matter landed in the Industrial Court in October 1990. After protracted litigation over six years, the Court of Appeal, in a landmark judgment, ordered the reinstatement of the 21 activists on Oct 1996 with no loss of seniority, benefits and wages. These activists were then accorded registration of the union by the Director-General of the TU, whereupon the company applied to the High Court for the decision to be set aside, which was granted. Thus the unionists took the matter to the Appeals Court in May 1998. Until today, however, no date has been fixed for a hearing.

216

Labour Organisation, which was sponsored by the government, was formed in 1989. Owing to lack of progress, however, the MLO was dismantled in 1996.

Under Ponniah’s leadership, CUEPACS became more aggressive in pursuing the interests of the civil service workers. For example, CUEPACS pushed the claim for ‘full service pensions’ via its submission of a series of well-prepared memoranda on how this could be achieved and yet kept within a two-billion-ringgit ceiling which the government insisted upon. After two years of deliberations, the government apparently agreed to CUEPACS’s proposal only to overturn its stand after Ponniah stepped down as CUEPACS president when he reached compulsory retirement age in the government service. Apparently, the Public Service Department had submitted that it was not possible to cap the proposed full pension scheme at two billion ringgit to which the post-Ponniah CUEPACS leadership simply had no counter proposal. Consequently, the agreement to introduce ‘full-service pensions’ promised to Ponniah was scuttled (Ponniah 1996).

This episode highlights not just the internal differences among the public sector union leaders. It further highlights that the public sector unions, although affiliated to CUEPACS, in effect, no longer have collective bargaining rights. For some observers, this occurred with the replacement of the National Whitley Council, which was the machinery for collective bargaining, with the Joint Councils in 1979. In contrast to the Whitley Council, the Joint Councils simply functions to solicit views from the public sector unions which led one union leader to quip that they were now reduced to ‘collective begging’ (George 2004).

In this regard it is significant that the government’s announcement in late May 2007 of a revised salary scheme for government employees surprised even the CUEPACS leaders! Just weeks before the announcement, they had complained publicly that they had not been consulted, nor had their memorandum been discussed yet (The Star 2 May and 22 May 2007). It appears, therefore, that the Public Services Department – which sets the terms and conditions of employment for civil servants – had acted unilaterally.

The situation in the private sector is equally dismal although for a different reason – the MTUC which is registered as a society, not as a union, is disallowed involvement in collective bargaining on behalf of the private sector unions. Hence, although particular affiliate unions may consult the MTUC, they must engage in direct bargaining with the employers independently.

No doubt coercive laws and repression by government have contributed to the depoliticization of the unions. Add to this the internal problems of the union leadership. The following account of the NUPW, the largest of Malaysia’s trade unions, is illustrative of the sad state of affairs. In this case, part of the NUPW’s problem was its domination by a single personality which resulted in creeping nepotism and favouritism, that compromised the ability of the union to address the changing needs and problems of its own members. National Union of Plantation Workers (NUPW)

Established in 1954, the NUPW was founded by Indian trade union leaders active among Indian estate workers who were independent of the communist-influenced unions during the immediate post-war period. Indeed, the formation of the NUPW was actively

217

promoted by John Brazier, the colonial trade union advisor, as well as the Malayan Plantation Industries Employers Association (MPIEA) (Ramachandran 1994: 251). With the smashing of the militant plantation trade unions, the NUPW emerged as the sole union representing plantation workers as well as the largest trade union in the country. In 1980, the NUPW’s had an estimated membership of 80,000 workers who paid a total of about RM500,000 in union dues each month. Over the years the NUPW set up its own multi-purpose cooperative and small businesses. It acquired several buildings, purchased several plantations of its own, launched a settlement scheme, and invested its funds in the stock market. It further boasted a staff of 215 full-time employees, about 75 of whom worked in its Kuala Lumpur headquarters, and the rest in eight state branches. Of the estimated 250,000 workers employed in the estates in the early 1990s, only about 32 per cent were unionised, principally in the larger estates. It appears that there was little effort to cater to workers in the smaller estates where conditions were harsher. Consequently, conditions in the non-unionised estates actually worsened (Ramasamy 1994).

Four other critical issues contributed to the worsening working situation in the estates. First, although the productivity levels of the estates increased (Ramachandran 1994 and Ramasamy 1994) remunerations to the workers did not keep apace: real wages remained constant. This has everything to do with the structure of wages which is daily-rated without provision for annual increments or bonus. Unable to gain better daily rates from management in their negotiations, the NUPW in 1982 re-launched the campaign to introduce a monthly-rated wage scheme, one of its collective bargaining issues first raised in the 1960s. The campaign was automatically rejected by the Malaysian Agricultural Producers Association (MAPA, previously MPIEA) whereupon the matter was referred to the Director-General for Industrial Relations for conciliation, then to the Minister of Labour for compulsory arbitration, and finally to the Industrial Court. But the Court again rejected the NUPW’s claim in 1985.175 Thereafter, the NUPW returned to negotiating a new collective agreement wherein it gained MAPA’s agreement to guarantee a minimum of 24 days of work per month. On this basis the NUPW leadership claimed victory in its demand for monthly pay.

A second problem pertains to housing. Except in a few estates, workers continue to live in quarters or lines provided by the employers. But some of the lines still lacked basic utilities like electricity. Many depended on common stand pipes and even bathroom facilities. Upon retirement, workers are obliged to vacate the quarters unless their children are also employed in the estates, which is less frequently so now since the young prefer to migrate to the urban areas to look for alternative employment. Consequently, elderly former workers and their families face the threat of eviction and homelessness. In view of this, a ‘home ownership scheme’ for estate workers was proposed by the government in the late 1960s. In 1973, a task force involving various government departments and MAPA representatives was set up to co-ordinate and implement the scheme. A revolving fund of RM10 million was allocated for this purpose. Yet by 1989, less than 10 per cent of the MAPA estates had actually implemented the scheme. There were various reasons, among them: too miniscule an allocation; bureaucratic delays in converting agricultural land for housing purposes; MAPA’s lack of interest and sincerity; and the NUPW’s lack of involvement in this critical matter. Many cases of evictions have occurred and countless threats of evictions are pending in estates throughout the country. Ironically these evictions and threat have often arisen on account of the conversion of the estates into private housing development projects either by a subsidiary of the MAPA company that owned the estate, 175 The Industrial Court held that the NUPW had not presented a convincing case for the monthly-rated scheme and questioned the credibility of the union whose own estates had not adopted a monthly pay structure (Ramachandran 1994: 279)

218

or following a sale of the estate land to a housing developer. Although there is a great sense of urgency on the matter, it does not appear that the NUPW has addressed the issue comprehensively.

A third problem is the re-introduction and increasing use of the ‘third party contract system’ in the estates (Ramasamy 1994: 288). Previously utilised mainly to employ Chinese workers who resided elsewhere, nowadays it is used to introduce foreign workers into the estate sector, including the unionised estates. Under this system, the foreign workers are not even entitled to the miniscule benefits and protection won by the NUPW in collective agreements. Since it is cheaper to employ workers in this manner, jobs are becoming scarce for local workers, unless they are prepared to work under less remunerative conditions. The NUPW has been unsuccessful in combating this new employment arrangement, particularly common in the smaller and non-unionised estates. More that that, many unresolved disputes, for example, over hospitalization benefits and the amount of free medical services available, or the quantum of gratuity payable upon retirement or severance pay due on retrenchment, could not be resolved due to the weakened state of the unions. The MTUC president held that ‘even if [the NUPW] were to resort to its “most powerful tool”, that is, the strike, this will no longer affect the plantation companies which can continue to function utilizing the workers provided from the labour-providers and the migrant workers’ (Syed Shahrir 2007).

Unable to address the above problem satisfactorily, the organization of the NUPW evolved into a system of patronage. Although delegates met every three years to elect an executive council, P. P. Narayanan, the general secretary from 1954 to 1993, dominated the NUPW for almost 40 years. In practice, ‘nominations to the executive council [were] carefully guarded to ensure that no individual [was] able to sit in the council without the tacit approval of the general secretary’. In fact, it was the general secretary who appointed the secretary and treasurer of the state branches, the two key officials who in turn appointed the industrial officers, the field officers, clerks and drivers in the state branch. They also appointed the secretary/collector of the estate branch who attends to petty problems but more importantly is responsible for collecting the monthly dues; he gets to keep seven per cent of the total collection (Ramachandran 1994: 257). In view of the NUPW’s state, members’ disillusionment with the leadership was widespread and union membership progressively declined from about 124,000 in 1983 to about 100,00 in 1990, to about 65,000 in 2005, only about 30 per cent of the total number of plantation workers. Business organizations

Prior to the NEP, the vast majority of domestic businesses were small and medium-sized enterprises (SMEs) mostly owned by ethnic Chinese. Based on the nature of their businesses these SMEs came together to form industry-specific organizations, among them associations that catered for those involved in textile and apparel, wood processing, food-processing, cement production, construction, iron and steel works, etc. The organizations which brought together those businesses involved in the rubber and tin industries were the largest and perhaps most influential, among them the Perak and Selangor Chinese Miners Associations, and the Federation of Associations of Rubber Plantation Owners and of Traders for various states. Via such industry-specific associations, these businesses were further involved in the Chinese Chambers of Commerce of the various states, broad-based economic organizations representing businesses in different kinds of industries. A significant feature of most of these business organizations, whether more broadly-based or narrowly-defined according to industry, was that they were usually ethnically based.

219

There were similar ethnically based organizations of Indian and Malay business

interests but they were generally weaker and less influential. The principal and probably most influential business organizations in the pre-NEP period were those that involved the international businesses. They, too, had their own broad-based Malaysian International Chambers of Commerce and Industry (MICCI). However, the most prominent of them were the industry-specific organizations, including the Malayan Plantation Industries Employers Association (MPIEA, later the Malayan Agricultural Producers Association, MAPA), the Malayan Mining Employers Association (MMEA), the Commercial Employers’ Association of Peninsular Malaysia, Malaysian Commercial Banks Association (MCBA), States of Malaya Insurance Association (SOMIA), Motor Vehicles Assemblers Association, West Malaysia (MVAA), Electrical Industry Employers Association, and the Malayan Employers Consultative Organization (later the Malaysian Employers Consultative Association, MECA). The government had to pay special attention to these international organizations since their control and influence over the well-being of the Malaysian economy.

However, the business class was not united in the immediate post-Independence period. There were factions of capital organized on an ethnic basis. Hence when the pro-bumiputera NEP was promulgated, the bumiputera business class welcomed it while their non-bumiputera counterparts rejected it. Perhaps these differences are best appreciated by recounting how the different ethnically based businesses and their respective Chambers of Commerce responded to the highly controversial Industrial Coordination Act (ICA) 1975.

The introduction of the ICA and the establishment of the Foreign Investment Committee in 1975 were to enable the federal government to regulate business, especially local Chinese enterprises and foreign companies, to ensure their compliance with NEP quotas in a determined way. To this end, the Ministry of International Trade and Industry (MITI) was given discretionary powers over licensing, ownership structure, ethnic employment, production distribution quotas, local content and the pricing of products (Jesudason 1989: 135–40). Predictably, Chinese business rejected the ICA, especially since the act originally applied to all manufacturing firms that had shareholder capital of RM100,000 or more, or which employed more than 25 workers. According to a 1971 survey of manufacturing establishments an estimated 65 per cent of the firms surveyed were either sole proprietorships or partnerships, essentially family-based SMEs (Jesudason 1989: 139). Yet almost all would have come under the ambit of the ICA. Invariably, these family-based SMEs queried why they had to share their companies which they had built diligently with bumiputera partners and at discount rates to boot.

The Chinese Chambers of Commerce then organized to push for the repeal of the ICA. Initially, the Chinese Chambers of Commerce lobbied for support from the International Chambers and the Malay Chambers but the latter two were reluctant to support their Chinese counterpart. The Malay Chambers stood to gain from the application of the ICA. The International Chambers did not find the ICA requirements to be particularly irksome since their greater concern was to ensure a conducive climate for foreign investments, including the supply and control of labour. In fact the government promoted cooperation with foreign investors who were considered to be more ready to comply with the requirements of the NEP. In the event, the Chinese Chambers next mobilized the Chinese business associations and lobbied the Chinese-based political parties in the ruling coalition to support their cause. In the end, the

220

government amended the ICA in 1976, and again in 1978, so that the ICA applied only to firms which had RM250,000 (instead of the original RM100,000) or more in shareholder capital, or which employed more than 50 (instead of the original 25) workers.

Despite these amendments, it was apparent that Chinese businesses remained dissatisfied. Their responses to the ICA took several forms. First, several major businesses moved their operations overseas. Those which did not assumed more short-term strategies by shifting their investments to property development for instance, or by acquiring other existing companies. Second, smaller businesses which did not have the means to move overseas or enter other sectors easily, fragmented their businesses by setting up ‘associate companies’, each of which circumvented the ICA by operating below its stipulated thresholds. A third group entered so-called ‘Ali-Baba arrangements’ with bumiputera ‘sleeping partners’176.

Fourth, the MCA also proposed the consolidation and corporatization of Chinese businesses which would seek listing in the burgeoning Kuala Lumpur Stock Exchange (KLSE). By doing so, the Chinese SMEs and even the family-based firms could expand via public listing, transfer a certain percentage of equity to bumiputera interests as required by the NEP, and yet ensure managerial control in the board rooms. To this end, the MCA set up its Koperasi Serbaguna Malaysia (KSM), a deposit-taking cooperative which drew in myriad Chinese associations, which in turn established the Multi Purpose Holding Corporation, and subsequently, other companies, too. Not surprisingly, competition between the ethnically based factions of the business class moved into the KLSE, wheeling and dealing in corporate mergers and takeovers. Despite all these, capital flight occurred and a sharp drop in domestic investments persisted during the late 1970s and early 1980s. Writing in the late 1980s, Jesudason (1989: 159–63) rightly noted that more rapid economic progress in Malaysia was then being undermined by ethnic factionalism within the business class on the one hand, and by intense hostility between the state and domestic capital dominated by Chinese businesses, on the other.

The situation only improved after the 1985–1986 recession. By that time more neo-liberal economic policies were being considered and then adopted in order to resuscitate the Malaysian economy. In effect, the NEP was held in abeyance, as the economy was liberalized, deregulated and privatized. In late 1986, the ICA was amended yet again: only firms having more than 75 workers or over RM2.5 million of paid-up shareholder capital had to comply with NEP requirements. This made it easier for the Chinese SMEs to launch new projects, and for existing businesses to expand or to diversify their existing investments. As well, to attract FDIs, the Promotion of Investment Act 1986 provided additional tax incentives for manufacturing, agriculture and tourism (Jomo, Khoo and Chang 1996: 92–94).

Since the end of the NEP in 1990 and its replacement by the National Development Policy (1991–2000), the government has adopted more neo-liberal policies and promoted state-business cooperation under the auspices of Malaysia Inc. Important changes have occurred in the structure of Malaysian business, and in state-business relations too. As an outcome of the NEP, there exists prominent business people and corporations of all ethnic backgrounds in the upper levels of the corporate world. Malaysian corporations and so-called government-linked corporations now dominate the economy. A growing number of these corporations are also inter-ethnic

176 On the ‘Ali-Baba’ arrangements, and their subsequent transformation, see Chin (2004)

221

partnerships, though not all have been sustainable (Gomez 2005). There is evidence that Sino-Bumi ‘smart alliances’ and ‘genuine partnerships’ have started to replace the ‘Ali-Baba’ arrangements at the SME level (Chin 2004) In what follows, we shall principally focus on the new organizations and their relations with the state.

The various ethnically based Chambers continue to play important roles on behalf of their constituent groups. For instance, the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM), which represents the interests of the Chinese SMEs in particular, promotes cooperation among its members and constituent bodies as well represent them vis-à-vis the government. During and following the 1997–98 regional financial crisis, the ACCCIM worked closely with official bodies like the National Economic Action Council, the Ministry of International Trade and Industry, Bank Negara etc. in surveying and assessing the effects of the crisis upon Chinese business; disseminating information on how to adapt the SMEs to the new global situation as well as to apply for various benefits and incentives provided by the government, etc (ACCCIM 1997a; 1997b; 1999; 2001a and 2001b).

Apart from the ACCCIM and its counterparts for the other ethnic groups, there have emerged new inter-ethnic bodies like the Joint Chambers of Commerce and Industry of Malaysia that attempts to represent the business class as a whole. However, it is the Malaysian Employers Federation (MEF) that epitomizes inter-ethnic cooperation at the business class level, perhaps because the business interests can unite quite easily since they are pitted against labour in this instance.

Established in 1978, the MEF brought together the Malayan Agricultural Producers Association (MAPA), the Malayan Mining Employers Association (MMEA) and the Malayan Employers Consultative Association (MECA). The MEF is regarded as the central organization of private sector employers and it serves as a forum for consultation and coordinated thinking among employers on matters of common interest, particularly on labour issues. It sits on the boards of numerous government councils and bodies like the National Labour Advisory Board, the Employees Provident Fund, Social Security Organisation, etc. Owing to such involvement and the cultivation of close ties with government, the MEF is confident that their interests will be given due attention even when the government participates in the collective bargaining process as a third party. In 1978, the MEF comprised 877 members. By 2007, the MEF boasted a membership of 4,058 employers comprising all sectors of commerce and industry and the professions, large and small. Its head office is in Kuala Lumpur while it maintains regional offices in Penang, Johore Bahru, Kuantan and Ipoh (www.mef.org.my/public’aboutmef_history.aspx).

One of its major current concerns is to provide input into the ongoing process of restructuring industrial relations in Malaysia, which has resulted in various proposed amendments to the Employment Act, the Industrial Relations Act, the Trade Unions Act etc, which will be addressed in the following section. IV. Policy-making in social development Declining unionism amidst structural changes in the work force

According to Syed Shahir, the current MTUC leader, Malaysia’s work force in 2005 totaled more than 10 million; however, only about 780,000, or 7 per cent, are

222

unionized (Syed Shahir 2006: xiv). Apart from the coercive laws and the leadership problems of the unions, two important considerations explain this declining unionism. First, there has occurred an expansion but also differentiation of the manufacturing sector. The vast majority of the manufacturing establishments are SMEs. Accordingly, there has occurred fragmentation of the labour force which makes it difficult to organize the workers. Second, certain structural changes have occurred in the demography of the labour force too, namely, the rising numbers of Malays, women, and migrant workers, whose fragmentation – by ethnicity, gender and national origin – has further contributed to declining unionism.

Traditionally, the majority of workers were found in the agricultural sector (particularly in the rubber and oil palm plantations) and in the government services. Not surprisingly, the NUPW has been the largest trade union. At its peak in the 1960s, it boasted a membership of 160,000 members. Apart from the NUPW, the strong unions comprised those in the government agencies that provided public utilities and services. They included the National Electricity Board Employees Union, National Union of Telecoms Workers, the Malayan Nurses Union, Amalgamated National Union of Local Authorities’ Employees, Public Works Department Unions, the Railway Workers Union, Customs Workers Union, and the various teachers’ unions, (which were previously divided but have been brought under the umbrella of the National Union of the Teaching Profession). A third group of unions comprised those employed in the private sector, usually in a similar industry or occupation like the National Union of Bank Employees, National Union of Commercial Workers, National Union of Petroleum and Chemical Industry Workers, National Union of Mine Workers, Metal Industry Employees Union, Electrical Industry Workers Union, National Union of Journalists, etc. (Table 5).

Table 5 The 20 Largest Unions and their Membership 1985

Rank Name of Union Membership 1 National Union of Plantation Workers 100,052 2 National Union of Teacher Services 28,546 3 Amalgamated National Union of Local Authorities’ Employees 18,025 4 National Union of Telekom Employees 15,531 5 National Union of Commercial Workers 14,571 6 Union of Malay Teachers of West Malaysia 14,217 7 National Union of Bank Employees 12,922 8 Transport Workers Union 10,201 9 National Electricity Board Employees Union 9,884

10 National Union of College-Trained Teachers 8,537 11 Malayan Nurses Union 8,113 12 National Union of Petroleum and Chemical Industry Workers 7,899 13 Union of Public Workers in the Armed Forces 7,763 14 Metal Industry Employees Union Malaya 7,515 15 Electrical Industry Workers Union 7,304 16 Union of FELDA Workers 6,131 17 National Union of Hotel, Bar and Restaurant Workers 4,347 18 National Union of Mine Workers 3,916 19 Police Administrative and Civilian Staff Union 2,787 20 All Malaya Estate Staff Union 2,007

Source: Ministry of Labour, Annual Report 1984/85: 198

223

As the economy has moved away from agriculture towards manufacturing and services (Tables 1 and 2), the proportion of those employed in manufacturing and services has increased from about 50 per cent in 1970 to almost 70 per cent of the total employed in 2005 (Table 3). Reflecting this shift, of the 235 MTUC affiliates in 2002, 72 are involved in manufacturing, 51 in transport and communications, and 29 in other forms of services (apart from 34 unions in the government services). These figures belie the fact that the vast majority of the new unions in manufacturing (and in the new services) are small in terms of membership. Although beset by problems and falling union membership, nonetheless the NUPW remains the largest union. Likewise, the other ‘traditional’ unions listed in Table 5 remain among the largest and most active. In part, the lag in the unionism in the manufacturing sector is due to the government’s refusal to register industry-wide unions (as in the case of electronic workers), and its support for the formation of ‘enterprise’ or in-house unions instead.

Table 6 Principal Statistics of Manufacturing

Industries by Major Industrial Group 2000 Industrial Group % of

Establishments % of

Employees Food Manufacturing 14.8 6.89 Beverage industry 0.55 0.36 Tobacco manufacturers 1.38 0.94 Manufacture of textiles 3.37 3.52 Manufacture of wearing apparel except footwear 13.49 4.29 Manufacture of leather and products of leather, leather substitutes and fur, except footwear and apparel

0.37 0.21

Manufacture of footware except vulcanized or moulded rubber or plastic

0.51 0.19

Manufacture of wood, wood and cork products, except furniture

7.46 10.28

Manufacture of furniture and fixtures, except those primarily of metal

6.50 2.86

Manufacture of paper and paper products 1.50 1.67 Printing, publishing and allied industries 4.62 2.53 Manufacture of industrial chemical 1.02 1.35 Manufacture of other chemical products 1.74 0.18 Crude oil refineries 1.74 0.07 Manufacture of rubber products 2.31 4.78 Manufacture of plastic products, N.E.C. 5.27 5.20 Manufacture of pottery, china and earthenware 0.42 0.47 Manufacture of glass and glass products 0.36 0.58 Manufacture of non-metallic mineral products 3.78 3.17 Iron and steel basic industries 1.95 1.70 Non-ferrous metal basic industries 0.31 0.70 Manufacture of fabricated metal products, except machinery and equipment

11.8 4.92

Manufacture of machinery except electrical 6.17 5.22 Manufacture of electrical machinery, apparatus, appliances and supplies

4.38 29.90

Manufacture of transport equipment 2.52 3.81 Manufacture of professional and scientific and measuring and controlling equipment, N.E.C.

0.25 1.59

Other manufacturing industries 3.37 1.63 Total 100 100

224

Source: Department of Statistics, Annual Survey of Manufacturing Industries (2000)

The lag can also be attributed to the increased differentiation of the manufacturing sector itself as indicated in Table 6 which lists the manufacturing industries by major industrial group in Malaysia for 2000. Table 7 highlights that the estimated 2.12 million workers were employed in 27,419 manufacturing establishments. From Table 7, it will be seen, too, that almost half these employees worked in establishments which employed less than 10 workers each. In other words, about half of the establishments in the manufacturing sector were essentially small enterprises. And if an SME is further defined as a manufacturing establishment with less than RM2.5 million paid-up shareholder capital, then an estimated 84 per cent of the total manufacturing establishments in 1995 could be categorized as SMEs. In that year, such SMEs accounted for 18 per cent of the total manufacturing employment.

Table 7 Number of Establishments and

Employees in the Manufacturing Sector 1995–2000 Year No. of

Establishments No. of

Employees Size of 1–9 Employees

(%) Size of 10 and Above

Employees (%) 1995 22,453 1,389,545 44.67 55.33 1996 23,462 1,448,834 46.91 53.09 1997 22,799 1,429.746 46.93 53.07 1998 21,593 1,391,026 45.21 54.79 1999 22,037 1,327,924 44.97 55.03 2000 27,419 2,125,871 48.73 51.27

Source: Dept of Statistics, Annual Survey of Manufacturing Industries, various years With such differentiation of the manufacturing sector, it is understandable that there exists little common interest between workers in one industry and another. Moreover, the kinds of employers and management faced by workers varied from industry to industry. Certain industries were dominated by modern MNCs and employed large numbers of workers as in the electronics industry; others were family-run SMEs that employed less than 10 workers and tended to be paternalistic in their treatment of their employees. Invariably, there would be myriad differences in terms of the problems faced. Consequently, when unions were formed, they tended to focus on narrow interests that were specific to the industry or firm, and were small in size.

In addition, due to a high level of mobility in the private sector, workers could now have access to upward mobility, as well as lateral mobility to another company. For such workers, there was little need to participate in unions whatsoever. It is also likely that many manufacturing and service workers, perhaps due to ignorance of the benefits of unionism, or due to the lack of attractiveness of the movement, have chosen not to join or form unions. Hence, although the number of workers, especially in the manufacturing sector, has grown, the proportion of unionized workers, especially in manufacturing has not grown apace. In fact, the union movement has experienced fragmentation, too, as unionized workers, especially in the manufacturing sector, tend to belong to small unions nowadays.

The demographic pattern of the labour force has also changed in three regards. First, more and more Malays, especially women, have joined the industrial work force (Table 4). Initially, most Malay workers were reluctant or hesitant in joining the trade unions which were largely led by non-Malays, especially Indians. Instead, the Malays

225

workers tended to turn towards the dominant Malay political party, UMNO, to resolve their problems. Although more Malays are now involved in the leadership of the unions, a large proportion of Malay workers has remained outside the unions177.

Second, beginning from the 1970s, as the export-led labour-intensive electronics industry was being developed, a process that has been dubbed the ‘feminization of labour’ (Ng 2004) occurred wherein more and more unskilled women, a majority of whom were Malays, were recruited into the work force. The labour force participation rate of women increased from 37 per cent in 1970 to 47.1 per cent in 1995, but dropped to 44.2 per cent in 1999, following the financial crisis (Table 8). About 85 per cent of women workers are in the manufacturing and services sector located in the urban areas. Women are particularly important in the electronics industry where they make up about 90 per cent of assembly line workers. They also account for more than 70 per cent of the employment in the textile and garments industry. The jobs in both industries are generally low-skilled and labour intensive. Indeed, there occurs much gender disparity in wages, and women are generally paid less than men for the same type of job in some sectors in the private sector. Since unions were not allowed to be established in the free-trade zones, where the electronic assembly plants were located, a significant proportion of the labour force was non-unionized. Even when in-house unions were later established, most enterprises continued to prevent their workers from establishing trade unions. And, significantly, women account for about 40 per cent of union membership nowadays (Table 9).

Table 8 Labour Force Participation Rates 1985–1999

Participation rates (%) Year Labour Force (‘000) Total Male Female

1985 6,039.1 65.8 87.4 44.3 1990 7,042.0 66.5 85.6 47.3 1995 8,256.8 66.9 86.8 47.1 1999 9,010.1 64.3 83.4 44.2

Source: adapted from Chan, Moha Asri and Zikri Muhammad (2003: 13)

177 Interestingly, some of the Malay unionists like MTUC president Syed Shahrir and MTUC Penang branch chief Abdul Razak have been closely involved with the opposition parties. On the other hand, the former MTUC president Zainal Rampak, who also used to be associated with the opposition party, has since joined UMNO after he was appointed a Senator to the Malaysian Parliament.

226

Table 9

Number of Trade Unions and Membership by Gender 1952–2004 Membership Year Number of

Unions Total Male (%) Female (%) 1952 214 127,946 101,022 (79.0) 26,946 (21.0) 1960 250 169,180 124,755 (74.0) 44,305 (26.0) 1978 267 481,658 357,416 (74.0) 124,242 (26.0) 1980 276 503,686 367,280 (73.0) 136,406 (27.0) 1985 284 521,348 381,457 (73.0) 139,891 (27.0) 1990 450 659,280 465,661 (71.0) 193,619 (29.0) 1992 479 680,007 463,697 (68.2) 216,310 (31.8) 1993 496 693,581 450,828 (65.0) 242,753 (35.0) 1994 501 699,373 450,047 (64.3) 249,326 (35.7) 1995 504 706,253 450,307 (63.8) 255,946 (36.2) 1996 516 728,246 465,098 (63.9) 263,148 (36.1) 1997 526 734,685 466,549 (63.5) 268,136 (36.5) 1998 532 739,636 468,143 (63.3) 271,493 (36.7) 1999 537 725,322 461,938 (63.7) 263,384 (36.4) 2000 563 734,037 470,653 (63.7) 263,384 (36.4) 2001 581 802,260 472,065 (60.1) 312,816 (39.9) 2004 597 782,659 474,470 (60.6) 308,638 (39.4)

Source: Ministry of Labour/Human Resources, Department of Trade Union Affairs, Labour Indicators (various years) However, it has also been reported in several accounts, for instance, of the RCA-Harris workers’ attempt to unionize, that women workers have been discouraged from participating in unions but encouraged to seek redress via the establishment of enterprise-based Islamic affairs committees instead. Lastly, women workers have also cited sexism among male trade union leaders as an explanation for their non-involvement (Rohana 1994: 47–72).

Third, the rapid economic growth beginning from the late 1980s led to a labour shortage. The corollary to this was an influx of migrant workers. In 1987, the government sanctioned the use of migrant labour when it undertook the first exercise to legalise Indonesian labour in the plantation sector. This process was extended in subsequent years to other sectors including construction, services, manufacturing and domestic help. The total number of migrant workers increased throughout the 1990s before the 1997–98 regional financial crisis compelled the government to take drastic action to reduce their numbers. However, with recovery, especially since 2000, the inflow of migrant workers resumed. In 2004, the number of registered workers totaled 1.4 million or 12.5 per cent of the labour force. Of these, 66 per cent were from Indonesia, 9.2 per cent from Nepal, 8.0 per cent from Bangladesh, 4.5 per cent from India, 4.2 per cent from Myanmar, and the remainder from Philippines, Thailand, Pakistan and Cambodia (Table 10). That same year, it was estimated that there were another 1.2 million workers who were not registered (MEF 2005). As such, they were deemed ‘illegal’, that is, they did not possess entry and employment permits. Invariably, the migrant workers, legal as well as illegal, remain beyond the reach of the unions. Nor are they protected under the Employment Act 1955. This means that they are not eligible for the Employees’ Provident Fund benefits, higher wage rates for overtime work, annual, sick and maternity leave, or termination and other benefits (Syed Shahrir 2007: 76–77). Whichever is the case, most of these workers were employed in the plantation, manufacturing and construction sectors while many of the women were employed as domestics (Table 11).

227

Table 10 Distribution of Foreign Workers by Country of Origin (%)

Country 1998 1999 2000 2001 2002 2003 2004* Indonesia 53.3 65.7 69.4 68.4 64.7 63.8 66.5

Nepal 0.1 0.1 0.1 7.3 9.7 9.7 9.2 Bangladesh 37.1 27.0 24.6 17.1 9.7 8.4 8.0

India 3.6 3.2 3.0 4.0 4.6 5.6 4.5 Myanmar 1.3 0.9 0.5 1.0 3.3 4.3 4.2

Philippines 2.7 1.8 1.2 1.0 0.8 0.6 1.1 Thailand 0.7 0.5 0.4 0.4 2.4 0.9 1.0 Pakistan 1.0 0.6 0.5 0.4 0.2 0.2 0.2

Other 0.2 0.2 0.3 0.4 4.6 6.5 5.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

* January to July Source: Annual Economic Report, 2004/05

Table 11 Distribution of Foreign Workers by Sector 1990 1995 2001 2004 (Jan–Jul) Sector

‘000 % ‘000 % ‘000 % ‘000 % Agriculture 115.8 47.9 173.0 36.1 284.1 32.9 335.2 24.7

Mining 1.4 0.6 1.8 0.4 2.1 0.2 – – Construction 25.1 10.4 64.8 13.5 99.0 11.5 269.1 19.8

Manufacturing 23.7 9.8 115.7 24.1 213.0 24.7 414.3 30.5 Services 76.0 31.3 124.0 25.9 265.6 30.7 340.9 25.0

Total 242.0 100.0 479.3 100.0 863.8 100.0 1,359.5 100.0 Source: Annual Economic Report, 2004/05

All told, as the numbers of workers increased, fewer and fewer of them are involved in the unions. In 2004, only 782,659 workers, or a mere seven per cent, of a total workforce of about 10 million were unionized. Further, although women comprise 40 per cent of total union membership nowadays, women form less than one per cent of the union leadership (Ng 2005: 4; Todd and Bhopal 2001). At any rate, most of the women union leaders are non-Malays even when a majority of the workers in the unions are Malays (Rohana 1994: 11). Under the circumstances, at least in terms of the proportion of unionized workers, there has been a weakening of the unions. Accordingly, there has occurred a drop in the percentage of workers who are covered by collective agreements, or in the case of most foreign workers, even the Employment Act. Not surprisingly, there have also been fewer cases of industrial actions – strikes or lock-outs or instances of picketing (Table 12).

228

Table 12

Number of strikes, workers involved and man-days lost 1971–2004 Year No. of Strikes No. of workers involved No. of man days lost 1971 45 5,311 20,265 1972 66 9,701 33,455 1973 66 14.003 40,866 1974 85 21,830 103,884 1975 64 12,124 45,749 1976 70 20,040 108,562 1977 40 7,783 73,729 1978 36 6,792 35,032 1979 28 5,629 24,868 1980 28 3,402 19,554 1981 24 4,382 11,850 1982 26 3,330 9,621 1983 24 2,458 7,880 1984 17 2,437 9,267 1985 22 8,710 34,773 1986 23 3,957 14,333 1987 13 3,178 11,035 1988 9 2,192 5,784 1989 17 4,761 22,877 1990 17 98,510 301,978 1991 18 1,920 6,610 1992 11 2,401 5,388 1993 13 2,399 7,162 1994 7 2,289 5,675 1995 2 1,748 4,884 1996 9 995 2,553 1997 5 812 2,396 2000 11 2,969 6,068 2001 13 2,209 5,999 2002 4 506 1,638 2003 2 57 114 2004 3 279 3,262

Source: Ministry of Labour/ Human Resources Labour Indicators (various years) Strengthening business and business-state ties Inter-ethnic differences within the business class have been on the wane, and so, too, the earlier antagonisms between the domestic business class (previously almost exclusively Chinese) and the state. These developments contributed towards the role of the state as a mediator of capital – rather than a protector of labour rights – within the rubric of neo-liberal economic globalization.

Of the various employer and business organizations, the Federation of Malaysian Manufacturers (FMM) is presently the most highly regarded, and given greatest attention by the government. This is not surprising considering Malaysia’s rapid industrialization, and the emergence of manufacturing as the largest sector of employment as well as highest revenue earner. Apart from the older manufacturing associations associated with rubber-based products, cement, iron, food-processing, wood-processing, etc., the FMM also represents the new industries like ceramics,

229

plastics, glass, pharmaceuticals, electrical equipment and electronics that are associated with export promotion and Malaysia Inc policies. Whereas in the past, the firms produced mainly for the domestic market and created cartel-like conditions to keep an eye on one another as well as to ward off new entrants, they now produce for external markets, and through the FMM, which works closely with the government, share information and collaborate to penetrate the regional and sometimes global market.

However, it is not the FMM but the industry-specific organizations – such as the Cement and Concrete Association of Malaysia, the Malaysian Iron and Steel Industry Federation (MISIF), Association of Industrial Power-Producers Malaysia (Penjanabebas), Free Trade Zone Penang Companies’ Association (FREPENCA), and the Malaysian Textile Manufacturers Association – that have most successfully pressured the government to provide various incentives to promote export-led industrialization. They have also learnt, by adjustments and adaptations, to have themselves included in the government’s list of designated industries that entitles them to preferential treatment (www.fmm.org.my/p_ne_it.asp).

The same observation can be made of the service sector. It is also the more narrowly-defined business organizations like the Association of Banks of Malaysia, the Lorry Owners’ Association, Association of Bus Companies, and the Association of Insurance Companies which have been successful in influencing government decision- making and acquiring benefits ranging from tax reductions or incentives, credit incentives, infrastructural facilities, or the removal of bureaucratic red tape, etc.

The ability of such associations to make gains vis-à-vis government is related to their being familiar with how the government is organized, and knowing which particular department, or departmental official to approach, and that top bureaucrats, in fact, have considerable power in interpreting policies. For example, most businesses in the manufacturing sector come under MITI, but businesses have to work with the Ministry of Finance as well, especially on matters of tax, and tax exemptions. Consequently particular organizations serving the interests of a given industry, exerting demands on the designated bureaucrat in a particular government department, tend to have greater influence over government decision-making than the broad-based economic organizations like the FMM which represents many different industries. Although these particular organizations are usually dominated by the big firms, the SMEs which might otherwise have little or no leverage vis-à-vis government, have also benefited by affiliating themselves to these organizations.

It is well known that a few big firms also deal directly with the minister or secretary-general of the ministry instead of with designated officials. In fact, these big firms would utilize the special ties they possess with the BN ruling parties, or with prominent BN politicians, to pressure particular ministries or ministers for particular concessions. In other words, there is a semblance of personal ties as well between the big business and firms and industrial establishments, and high level government officials. Such a situation is a short step away from ‘money politics’.

Even so, the FMM continues to play an important role through working with government to formulate broad policies affecting manufacturing as a whole. Accordingly, it had representation in various government councils like the Consultative Committee on Trade and Industry and other bodies organized under the auspices of the Malaysian Industrial Development Authority, National Productivity Centre, and Standards and Industrial Research Institute of Malaysia.

230

One such consultative body, perhaps the most influential, is the Malaysian

Business Council (MBC) that was set up in February 1991 by then Prime Minister Dr Mahathir. The MBC brought together cabinet ministers and top officials involved in foreign affairs, international trade and investment, and corporate leaders. The MBC’s role was to facilitate cooperation between the public and private sectors via the exchange of information and ideas and to propose trade and investment policies. Many MBC members often accompanied Mahathir on his overseas trips in search of investment opportunities as well as to attract foreign investors to Malaysia. In the early 1980s, a back-up research centre was established within the Institute of Strategic and International Studies (ISIS, the government think-tank headed by a Mahathir confidante) to service the MBC. At the inaugural meeting of the MBC, Mahathir delivered his keynote address titled, Malaysia: The Way Forward, which became the basis of ‘Vision 2020’, his strategy to promote Malaysia’s emergence as a developed nation by year 2020 (Khoo 1995: 227–38). Review and restructuring of labour-related laws

A way to gauge the relative strength of capital-state relations, as opposed to the relative weakness of labour-state ties is to assess the ongoing review and restructuring of several labour-related laws by government, an exercise deemed necessary to improve productivity and to enhance competitiveness under globalization.

To this end, the government introduced amendments to the Industrial Relations Act, Employment Act and the Trade Union Act in 2007. Apparently, the government had only consulted the MEF and not the MTUC prior to the introduction of the related bills in Parliament. Yet it was clear that workers would be much affected by the proposed amendments. For instance, one of the proposed amendments to the Trade Unions Act pertained to the procedures involved in setting up a union. Under the existing law, an employer was given 21 days to respond to an application by the workers to set up a union. If the employer did not respond in time, the workers could go to the Director-General of Trade Union Affairs to have the proposed union registered. However, the registration of a new union has been made more cumbersome under the proposed amendment. If the employer does not respond within the stipulated 21 days, the workers must inform the Director-General in writing within 14 days (after the first 21 days), failing which the application to form a union is automatically cancelled. In fact, the amendment allows other lower-rank officers in the Department of Trade Union affairs to deputise for the Director-General, and to perform his duties, including cancelling the union’s application (The Star 23 August 2007; theSun, 29 August 2007 and 17 September 2007).

Another controversial amendment pertained to due compensation to be paid to workers involved in an industrial dispute. Under the new amendment to the Employment Act, compensation will henceforth be limited only to 24 months’ wages, regardless of how long the case has been in dispute. This is a major change from the previous law according to which the amount of compensation depended on how long the dispute persisted.

The MTUC which had not been informed or consulted prior to the introduction of the amendment protested against its tabling in Parliament. In its Memorandum, the MTUC argued that the existing arrangement served as an effective deterrent against

231

wrongful dismissal by unscrupulous employers. Despite the MTUC’s protest, the amendment was passed passed (theSun 29 August 2007).

Another defeat for labour was the introduction of the new ‘Contributory Pensions Scheme’ (CPS) for new civil servants. In essence, the CPS was modeled after the Employees’ Provident Fund (EPF) which applied to workers employed in the private sector. Under the CPS, a civil servant would have to contribute 11 per cent of his own salary while the government contributed 12 per cent of the same to the CPS of the civil servant (The Star 9 June 2007). This was a drastic revision of the Pension Scheme which henceforth only applies to currently serving civil servants.

Yet another initiative was an amendment to the EPF Act, also passed in 2007, which reduced the quantum of the EPF to be paid to a worker who worked beyond the compulsory retirement age of 55 years. Despite strong objections by CUEPACS and the Malaysian Pensioners Association, henceforth, an employer needed to pay only six per cent (instead of 12 per cent) and the worker 5.5 per cent (instead of 11 per cent) to the EPF.

The passage of these new laws that favour employers stands in stark contrast to the lack of progress on two initiatives the MTUC had proposed to protect workers’ interests during this time of restructuring, namely, introducing ‘Retrenchment Scheme’ and ‘Minimum Wage’ legislation. The MTUC proposed that the Retrenchment Scheme should include monetary compensation and retraining of workers who lose their jobs. Under the auspices of the National Labour Advisory Council, a six-person Committee, comprising two representatives each from the Department of Labour, MEF and MTUC, was established. However, the MEF representative soon withdrew, arguing that the proposed Retrenchment Scheme meant that ‘good employers ended up paying for the mistakes of bad employers’. The FMM also came out strongly against the scheme. On its part, the MTUC argued that retrenchment was becoming widespread largely due to companies’ retrenching local workers and replacing them with cheaper foreign workers. In their memorandum, the MTUC provided concrete evidence of such goings-on in three manufacturing firms in Selangor and two firms in Johore (The Star, 18 November 2007). In fact, it was also alleged that some unscrupulous agents of migrant workers were using the documents of particular manufacturing firms, which allowed them to recruit migrant workers, to recruit more foreign workers than were needed by those companies. The result was an oversupply of foreign workers who, desperate for employment, were prepared to work at even lower rates than those obtained by foreign workers who had been brought in with promises of employment.

Finally, it is significant that the MTUC’s proposal for the introduction of minimum wage legislation (to be set at RM900 per month with an additional RM300 cost-of-living-allowance) has been categorically rejected not only by the MEF and FMM, but by the Minister of Human Resources, too, who maintained that a minimum wage would lead to reductions in FDI and encourage the further employment of illegal foreign workers by manufacturing establishments (Syed Shahrir and Rajasekharan 2007; The Star, 26 June 2007, 6 July 2007, 25 July 2007, and 10 August 2007). Although the MTUC organized several pickets to lobby for the legislation, the government has continued to ignore the MTUC’s demand.

In conclusion, it appears that the antagonisms between different ethnic factions of business, as well as the hostility between the state and domestic (Chinese) capital, has been displaced by inter-ethnic collaboration in businesses, and by warmer state-business

232

relations – as epitomized by Malaysia Inc, the Malaysian Business Council, and the adoption of new pro-business legislation. These developments stand in great contrast to the persistence of hostile relations between the state and labour on the one hand, and of the weakening of organized labour on the other. V. Catering for the unorganized poor: Political parties, NGOs and the state

In the various Five Year Plans, several groups have been identified as poor communities needing special attention. They include rural Malay farmers and fisherfolk, the plantation workers (largely Indian), the Chinese ‘new villagers’, the Orang Asli and other indigenous groups in rural Sabah and Sarawak. To this list must be added the urban squatter communities, whose plight essentially signified a transfer of the problems of rural poverty to urban areas. This section will investigate how the interests of some of these groups are represented and conveyed to the policymakers.

There are three apparent trends. The first trend links the unorganized poor to the government development administrative machinery, particularly in poor Malay areas. In contrast to many developing countries, Malaysia has an impressive and relatively comprehensive rural development mechanism. In part this is a result of the NEP which favours the indigenous population. However, UMNO leaders are also keenly aware that the rural Malay community constitutes their major electoral constituency which must be catered for lest they rally behind the opposition Parti Islam (PAS). This facet of development administration will not be discussed as it will be discussed in greater detail by another Chapter.

The second trend is the transformation of the BN parties, particularly the non-Malay ones, into extensions of the development administrative machinery to the extent that this has become the raison d’etre of the parties at the local level. It is well known that the poor non-Malay communities have generally been neglected by the government. In this regard, a modus operandus for the provision of minor development projects and other services in non-Malay areas appears to have been established, albeit indirectly, via the new roles performed by the BN’s non-Malay parties. Funding for these activities, in turn, are derived from party coffers, and from the so-called Constituency Development Fund, an annual allocation given by the government, but only to the elected BN representatives to use in their constituencies. Put another way, it is a ‘reward’ – perhaps more appropriately a ‘bribe’ – given only to constituencies that have elected BN representatives. Not surprisingly, many poor non-Malay areas which previously supported the opposition (among others, in response to government neglect and out of frustration with the NEP’s discrimination) have ‘turned around’ to support the BN.

Accordingly, it is also in those areas serviced by the government development administrative machinery, and/or by the BN parties engaged in providing development projects and services, that a new political culture of ‘developmentalism’ has emerged. It had emerged in the early 1970s, when the state launched its plans to promote economic growth so as to achieve the NEP objectives. But the discourse of developmentalism came into its own in the 1990s in the midst of rapid economic growth and new opportunities associated with the neo-liberal policies of deregulation and privatisation. This new political culture valorizes rapid economic growth, a better standard of living and the resultant consumerist habits, and the political stability offered by the BN’s rule, even when the state resorted to authoritarian measures. Since no other party has ever ruled Malaysia, many ordinary Malaysians (including the middle classes who are usually regarded as the

233

harbingers of democratization) cannot imagine that political stability can be maintained in multi-ethnic Malaysia without BN’s rule. A ‘self-policing’ system in support of BN rule – believed essential for maintaining political stability which then attracts foreign investments and facilitates economic growth, and which ultimately results in higher standards of living and consumption – has kicked in. (By contrast, the opposition has had very limited or no previous experience of promoting development. Kelantan and Terengganu, states which had been ruled by the opposition PAS government during 1999 to 2004, experienced relatively lower rates of growth than the BN-governed states. Sabah, ruled by the opposition Parti Bersatu Sabah from 1985 to 1994, also experienced relatively slower growth rates).

Developmentalism, therefore, is the cultural corollary to the dirigiste developmental state when citizens, especially the middle classes, who have enjoyed improved living conditions begin to value economic growth, the political stability which allows it, and in the case of Malaysia, the BN government which has facilitated both. Put another way, it is a discernible appreciation and internalization of the development strategies and policies of the government, as well as the attenuated system of democracy the BN government has assembled.

There is yet a third trend which involves some NGOs that are generally urban-based and more concerned with middle-class issues. Among the NGOs are a small group of ‘critical’ NGOs that are engaged in development activities. They represent a trend that runs counter to the above two trends in that they advocate an ‘alternative development’ strategy that is critical of neo-liberal policies. We shall look at the nature of the relationship between these NGOs and the unorganized poor, their demands and how these are being pursued via mass action. Their relations with the government authorities have been tense, and sometimes characterized by conflicts. On several occasions, their demonstrations have been broken up by the police and those found ‘resisting’ were arrested. We shall elaborate on the activities of one NGO which focuses on the plight of the plantation workers. BN parties and developmentalism

We shall first look at how the BN parties have transformed themselves by jettisoning some of their overtly political roles and assuming more ‘developmentalist’ ones. In the early 1970s, with UMNO seizing new NEP-generated opportunities, and the BN’s non-Malay parties adopting self-help strategies since the NEP bypassed the non-Malays, the MCA in particular encouraged the Chinese associations to establish deposit-taking cooperatives. The funds that were raised were then pooled together to set up corporations involved in business, finance and trading activities. The MCA itself next ventured into media ownership and control, and developing educational ventures (Heng and Sieh Lee 2000). More pertinently, the BN parties also turned themselves into extensions of the state not simply to maintain power but to deliver goods and services at the local level. It is on this role of the political parties that we shall focus on.

A re-definition of the role of political parties, and even of the meaning of politics has accompanied the developmentalism. During this period of economic progress, the BN parties not only avoided debate over policies, especially when they involved ‘sensitive’ ethnic issues (like the status of Chinese schools, ethnic quotas for entry into universities, Islamisation, etc) but also de-emphasised political education and the mobilization of ordinary Malaysians. Instead, developmentalism embedded itself into the quotidian of local communities through the delivery of public works and

234

services by the BN parties, as well as their involvement in various educational, media and business activities. The examples of the MCA and the MIC are discussed briefly. The MCA

Significantly, the Malaysian Chinese Association (MCA) transformed itself into an extension and instrument of the state not merely to help maintain the status quo, but to provide goods and services to its supporters. On the educational front, the MCA has established its own university (the Universiti Tunku Abdul Rahman) and a college (Kolej Tunku Abdul Rahman) with five campuses in different parts of the country. The MCA raises funds from the public, and receives some subsidies from the governments to run UTAR and the KTAR colleges. Compared to the private universities and colleges, UTAR and KTAR tuition fees are considerably lower thereby allowing poor students to avail themselves of higher educational opportunities should they be denied entry into public institutions on account of the ethnic quotas. A related effort is Kojadi, a savings co-operative that provides low-interest loans to the children of its members to attend universities and colleges. Meanwhile, the MCA’s Langkawi Project caters to the educational needs of primary school children, especially in the Chinese New Villages, by organizing tuition classes, and providing school uniforms, books and bags for poor children.

The MCA is also well known for maintaining its so-called ‘service centers’, one in each constituency, and ‘complaints bureaux’, one in each state. These are partially financed by the controversial Constituency Development Funds. Lower class Malaysians, in particular non-bumiputera who complain that they are not attended to by the usual government agencies or departments, have approached the MCA centres and bureaux to resolve their everyday, personal or community problems and needs. These include getting their children into a school of the parent’s choice; applying for passports, hawker licenses and other official documents; seeking help when they have been overcharged for utilities now maintained by privatized entities; building and maintaining roads and drains and the local school; even looking for missing children or other loved ones! In a sense, the MCA was reviving some of the welfare work that it was charged with in the Chinese New Villages during the early 1950s. Those activities had endeared the party to poor Chinese (Loh 1988). However, when the opposition made gains in the New Villages during the 1960s, the MCA withdrew from this realm of activity, which had also turned out to be expensive to maintain.

At any rate, the BN parties ventured into business activities. In 1975, the MCA set up the Multipurpose Holdings Berhad (MPH) which forged close ties with the captains of industry and commerce. Together with them and their associations like the Chambers, the FMM, FEM, etc., MPH initiated various projects in support of the post-NEP economic policies which were friendlier to the private sector in general. In summary, therefore, the BN parties came to assume very different roles from those they performed at the point of Independence when freedom and justice were clarion calls, and popular mobilization was their raison d’etre. Ironically, the political parties seem to be encouraging their members to disengage from political participation (except to help the party during elections), and to engage in development activities instead. The MIC

235

In response to the NEP, the MIC adopted a two-prong strategy for protecting Indian interests.178 First, the MIC tried to persuade the government to classify the Indians as a separate and distinct group so that the particular problems they faced as a minority community would be recognised and quotas in some instances would be specifically reserved for Indians. Unlike the Chinese, the MIC argued, the Indians do not have a strong presence in the private sector. It, therefore, requested the government to provide soft loans to Indian businessmen and more opportunities for Indians to acquire shares in government-linked companies and privatised companies so that Indians may own up to 9% of total share capital in the corporate sector, in accordance with the Indian proportion of the total population.

A related aspect of this first prong of the MIC’s response is to lobby for more places for Indian youths in the public universities. However, taking after the MCA, the MIC has embarked on various educational endeavours. It operates two Technical and Further Education (TAFE) colleges, with twinning arrangements with Australian educational institutions, that provide opportunities for about 5,000–6,000 students a year. The MIC’s pride is the Asian Institute of Medicine, Science and Technology (AIMST), a private university located in Sungei Patani, Kedah.

Second, the MIC has encouraged Indians to be involved in the corporate sector of the economy. Like the MCA, the MIC also launched several co-operative societies including the Koperasi Pekerja Jaya in 1978. Unlike the Chinese, the Indian community’s response was poor due to the poverty of the workers, and lack of interest among the middle-class. Subsequently, a unit trust scheme was launched along the lines of the government’s Amanah Saham Nasional (that catered only to bumiputeras); this, too, did not prove successful. Next, the MIC set up Maika Holdings in 1983, its equivalent of the MCA’s MPH. By 1984, Maika boasted a paid-up capital of RM106 million raised from 66,400 shareholders, principally middle-class and upper-class MIC members. Touted the ‘symbol of Indian socio-economic advancement’, Maika, the MIC claimed, would provide opportunities for Indians to compete effectively against the public enterprises, the Chinese-based corporations and the multinationals.

Like the MCA’s MPH, MIC’s Maika went on an acquisition drive. Gomez (1995) has persuasively argued that the involvement of the BN parties in business led to factionalism as politicians competed against each other to have access to these business interests. In turn, the business interests facilitated patronage networks and control of the parties. The MIC was no exception. Moreover, there were many allegations of the misappropriation of funds. Maika registered huge losses that came to light during the recession of the mid-1980s (Gomez 1994). Several financial scandals involving the MIC have surfaced, the most controversial being the Maika-STM (Syarikat Telekom Malaysia) scandal,179 which highlighted not only the lack of accountability and transparency in the operations of MIC-related business ventures, but also the factionalism that characterises the MIC.

Meanwhile, the National Land Fund Cooperative (NLFC), launched in the 1960s, and geared towards helping the Indian estate community, also floundered although the NLFC did purchase six estates which provided employment to an estimated 2000 workers. 178 This is evident from the MIC document, ‘The NEP and the Malaysian Indians’, which identified the problems of the community and suggested ways to overcome them. The document was the product of the first MIC economic seminar held in 1974. Follow-up seminars were held in 1980 and 1990 (Ramachandran 1994: 307–9). 179 On this scandal, see Gomez (1994: 272–76).

236

Yet, the MIC was able to ‘take over’ two independent grassroots efforts, and in so doing project itself as a service-oriented party too, like the MCA.

One of these takeovers concerned the Shri Murugan Centres (SMC) that had been founded by Dr M Thambirajah, a former University of Malaya lecturer, in 1982. Initially, the SMCs catered particularly for poor Indian youths in the estates and squatter settlements. By 1997, there were an estimated 4000 SMCs throughout the country providing weekend tuition classes for approximately 20,000 students. They also organised special preparatory classes towards the end of each year for those sitting for the government examinations. However, by the late 1990s, the SMCs were no longer catering only for the poor Indians. They had acquired the reputation of providing effective and cheap tuition classes to those intending to sit for government examinations and attracted numerous middle-class children, too. In fact, they even began to ‘advertise’ themselves by citing the excellent results of the students they prepared for the examinations. At any rate, the success of the SMCs drew the attention of the MIC and led to the formation of linkages between the two. Although the SMCs were formally independent of the MIC, in fact Thambirajah was invited to sit in the MIC's central working committee. In response to criticisms that he had compromised the SMCs, Thambirajah has stated that he was pleased to have access to MIC funds and allocations that facilitated SMC’s growth (The Star, 25 May 1997).

The other takeover involved the Centre for Community Studies (CCS), an NGO based in Kuala Lumpur which originally focused its attention on the problems of poor Indians in urban squatter areas with a view to initiating community-based self-help projects and empowering poor Indians. Faced with financial problems, CCS leader Dr Denison Jayasooria, an England-trained sociologist, entered into an alliance with the MIC and formed the Yayasan Strategik Sosial (YSS). Following this ‘joint-venture’, the MIC allocated funds to the YSS enabling it to employ staff. In exchange, the YSS trained the MIC Youth and Wanita volunteers to engage in community-development work (The Star, 11 May 1997 and 7 July 1997). Subsequently, the MIC persuaded the BN government to allocate funds for YSS work in 37 locations in Selangor and the Federal Territory. Boasting a large staff as well as part-time MIC volunteers, the YSS effectively became the MIC’s new extension into the urban squatter communities. At this point, the YSS’s work includes ‘intensive women and family development programmes, skills training for youths and single mothers, and information technology literacy classes’ (The Star, 5 February 2002). No doubt, the efforts of the SMCs and the YSS have enhanced the reputation of the MIC among the poor and needy. Perhaps, as for the MCA, it is these extension services that sustain the BN parties like the MCA and MIC, in spite of their undemocratic features and other weaknesses NGOs

NGOs in Malaysia are limited to a few hundred.180 Compared to their counterparts in Philippines and Thailand, Malaysian NGOs have only achieved rather modest gains. Strict laws per se do not explain the difference. It is also on account of two other related factors. First, there is the polarisation of Malaysia’s society along ethno-religious lines. Second, there has occurred relatively more rapid economic development which, in turn, has facilitated the implementation of the NEP. As architect and guardian of the NEP, UMNO has been able to attract and maintain widespread Malay support. In view of the government’s relatively comprehensive and successful efforts, few Malaysian NGOs are

180 A useful volume on NGOs is Weiss and Saliha (2003)

237

involved in rural development issues unlike their regional counterparts. Instead, the major Malaysian NGOs are urban-based and generally address middle-class concerns. Also, until the late 1990s, most NGO activists were non-Malays.

Hence Malaysia has a number of successful consumer organizations. The most important of these is the Consumers Association of Penang (CAP) which has been active since the 1970s and has conducted campaigns to protect the rights of consumers. There are also environmental groups like Sahabat Alam Malaysia, Malayan Nature Society, and the Environmental Protection Society. These have lobbied with some success to protect the environment. Environmentalists have gone to court on several occasions, once to challenge the government’s hastiness to launch the massive Bakun Dam Hydro-Electric Project in Sarawak state, without conducting, as required by law, a comprehensive Environmental Impact Assessment (EIA) report.

Women’s NGOs include AWAM (All Women’s Action Soceity), Sisters-in-Islam, the Women’s Aid Organisation, and the Women’s Centre for Change. Largely due to their efforts, and cooperation with women’s wings of the ruling parties and unions, a Domestic Violence Act was introduced in 1996, and several laws which discriminated against women, successfully amended (Maznah 2002). Human rights groups include Aliran formed in 1977, and Suaram and Hakam, formed in the 1990s. They have led the campaign, supported by NGOs, opposition parties, unions, and the influential Bar Council, for the repeal of coercive laws, especially the draconian Internal Security Act (ISA) which allows for detention without trial. Legal support has also been provided to ISA and other political detainees and an educational campaign to make people more aware of their rights is on-going.

However, there have been a few NGOs that have paid special attention to the marginalised and their needs. They include the Centre for Orang Asli Concerns (COAC) that campaigns for the rights of the indigenous groups in Peninsula Malaysia, the Borneo Resources Institute (BRIMAS), the Sahabat Alam Malaysia and the Institut Pengajian Komuniti which take up the plight of the rural indigenous peoples in Sarawak, and PACOS, who do the same in Sabah. Amanah Iktiar Malaysia (AIM), Malaysia’s version of the Grameen Bank, initiated by a group of Universiti Sains Malaysia researchers, was also active in helping to alleviate the conditions of rural poor Malays in the northern part of Peninsular Malaysia during the 1980s. Its initial success resulted in its adoption by a federal government agency, its relocation to Kuala Lumpur, and its eventual demise due to politicization of AIM and mismanagement of its funds.

There are also some NGOs that have protested alongside the Peneroka Bandar (urban pioneers) facing eviction by land developers (Kua 2001). A significant aspect in this struggle was the rejection of the misnomer setinggan (or squatter) in favour of the more appropriate Peneroka Bandar (or urban pioneer) since in almost all instances, these pioneers had first developed the urban fringe land, abandoned agricultural land, disused mining land, or former estate lands where they had previously worked, sometimes, for several generations. The NGOs helped to produce a booklet outlining this rationale, the unjust laws, as well as how to conduct a struggle for decent housing and due compensation. Finally, there is the Estate Workers Support Committee (a coalition of Alaigal in Perak, the Kumpulan Kemajuan Masyarakat in Penang and Kedah, the Suara Warga Pertiwi in Klang, Selangor, and the Community Development Centre in Kajang, Selangor) which has focused on the plight of estate workers. The role of one of these NGOs, Alaigal, will be elaborated below.

238

Alaigal

Alaigal (literally ‘a wave’) is most active in the wider Kinta district, around Ipoh, Perak.181 It first worked among estate workers in the Sungai Siput area in 1986 and slowly extended its work into squatter areas just north of Ipoh. The focus of Alaigal’s work is two-fold. First, it is committed to helping the estate workers gain a fair wage ‘that is sufficient to meet all the family needs without having to work excessive over-time’. With other NGOs functioning outside Perak, Alaigal set up the Estate Workers Support Committee in 1996 and re-launched the campaign for the introduction of a monthly wage scheme that the NUPW had evidently abandoned by the mid-1980s. By careful study of the rubber industry and the earnings of MAPA estates, the Support Committee produced pamphlets showing not only how unjust the daily-rated wage system was, but also how the industry could easily afford a monthly wage scheme. Indeed, it argued for a monthly wage scheme that included annual increments, bonus and gratuity (upon retirement) or severance benefit (in case of retrenchment). These pamphlets helped the Support Committee to collect more than 50,000 signatures in support of the campaign. In 1998, several busloads of workers from various parts of the country converged at the doorsteps of Parliament to deliver these signatures to the minister of human resources who had earlier refused to receive the workers in his office. An opposition Member of Parliament who worked with the Support Committee, also moved an emergency motion in parliament for a discussion on the matter which was, however, rejected by the Speaker. Due to such publicity and pressure, the minister agreed to look into the matter. In June 1999, the MIC president announced that his party also supported the introduction of a monthly wage scheme and would submit a memorandum on the matter to the cabinet. In March 2000, the minister of human resources announced that he had commissioned a team of experts from the University of Malaya to study the issue.

Amidst these developments, MAPA announced in February 2001 that it had reached an agreement with the NUPW to implement a monthly wage system in the oil palm estates. But the guaranteed monthly income was a disappointing RM325, less than the average wage that most workers were already earning based on the daily rated wage scheme. Then, implementing the same scheme in the rubber estate sector was still being negotiated with the NUPW. Belatedly, in February 2002, MAPA announced its rejection of the monthly wage scheme for the rubber estate sector, citing ‘adverse economic conditions’ (The Star, 14 and 15 February 2002). The Support Committee roundly condemned the MAPA’s decision. It called for the University of Malaya study to be made public and the Minister of Human Resources to assume responsibility over the matter immediately. Better yet, the Support Committee called for the estates to be emplaced under the purview of the Minister of Rural Development so that the estates could become eligible for rural development funds. The matter could no longer be left in the hands of MAPA and the NUPW. Finally, it denounced the earlier agreement to introduce monthly wages in the oil palm sector as a sham. According to its investigations in several estates since its implementation, the Support Committee held that the scheme that was introduced was only a minimum wage scheme. The workers’ wages were still dependent on the amount of kernels they brought in each day. Accordingly, no money accrued to a worker if he did not work on a particular day, which was the ruling under the daily rated scheme. Yet, work was often unavailable not on account of absenteeism, but because of rain or, in the case of rubber estates, the annual ‘wintering’ of the trees.

181 For an elaboration on the issues covered in this section, see Devaraj (2002)

239

Second, Alaigal has campaigned for the ‘home ownership scheme’, better living conditions for estate workers, as well as just compensation for squatters when they were evicted by developers. Its 11-year campaign, mounted together with former workers of Klebang Estate (outside Ipoh), finally paid off when the developers agreed in November 2000 to pay ‘just compensation’ to the residents. This settlement has been celebrated as ‘the first time in Malaysia that an estate community has been granted housing lots as compensation for loss of housing caused by a retrenchment exercise’. But this victory did not come without sacrifices and suffering. For there occurred demonstrations, several occasions of arrests of residents and Alaigal supporters, court hearings, threats by gangsters, and even denial of water and electricity supply to the Klebang residents (Veerasenan 2000). As with its work in the campaign for a monthly wage scheme, here Alaigal linked up with NGOs working on the same issue elsewhere. In Sungai Patani, Kedah, for instance, the Kumpulan Kemajuan Masyarakat (KKM) had been working with the former workers of Aberfoyle Estate. According to the workers, the original owners had (verbally) promised the workers the land on which their quarters were located au lieu of compensation, when the property was sold and their services were terminated in the 1960s. Subsequently, sub-dividing of the estate occurred and the ownership of the land changed hands several times. The new owner has insisted that the land on which their quarters are located belongs to him and because the workers have disputed his claim, they have been denied electricity, and at one stage, potable water supply as well. In this case, the former estate workers together with KKM, have petitioned the state government and demonstrated in front of the state government office, as well as exposed the collusion of top Kedah MIC officials in denying them electricity and water supplies. On another occasion, the NGOs co-ordinated protests by the workers in front of Bukit Aman, the national police headquarters in Kuala Lumpur, to highlight abuses and the collusion of local police forces with the developers in several locales. In this instance, despite court cases pending, the police had aided the developers in attempting to evict the residents residing on disputed land. VI. Conclusion

Based on the discussions above, it is clear that the state of trade unionism leaves much to be desired, not least because only about seven per cent of the total workforce is represented by the existing unions.

Several factors have contributed to this state of affairs. First, there are the coercive labour laws and the ISA, and the persistent conflict within the leadership of the trade union movement in this third phase of its historical evolution. Second, during the past three decades there has been an increasing segmentation of the work force, especially evident in the manufacturing sector. Add to this the changing demographic pattern of the work, namely, more Malays, more women and more migrant workers from throughout the region, and it is no wonder that there has been fragmentation of the labour movement as the size of the work force expands.

In contrast, the business class which used to be riddled by inter-ethnic antagonisms is now characterized by inter-ethnic cooperation. Its organizations like the FMM and FEM, and their affiliates have been able to pressure government to attend to their interests. As well, it appears that the state deals with the business class and their associations with much respect and appreciation. For under the present conditions, it expects the private sector to be the engine of economic growth in the country.

240

Indications of their close cooperation include Malaysia Inc policy and the formation of the influential MBC.

That said, the government has also shown keen interest on improving its social policy provisions. In this regard, it must be acknowledged that the Malaysian government possesses an impressive and quite comprehensive rural development administrative mechanism which is capable of delivering goods and services to the rural poor. Allocations for the delivery of such are made in the various Plans. Significantly, the lag among non-Malay poor groups has been taken up by the non-Malay BN parties – the MCA and MIC – which have transformed themselves to assume business roles on the one hand, and as purveyors of public works projects and social services on the other. The NGOs have helped certain marginalized groups to seek redress but their overall impact on social development matters remains rather limited in scope. Such peculiar arrangements facilitate the achievement of development goals while explaining why the BN government, no doubt an undemocratic one, has been returned to office time and time again. Perhaps Harold Crouch (1996) is right when he categorizes the Malaysian political system as a repressive-responsive one.

241

References ACCIM (Association of Chinese Chambers of Commerce and Industry) (1997a), ‘ACCIM Memorandum on issues, proposals and recommendations on employment of foreign workers’ ACCIM Bulletin, Issue No 2/97, May, pp. 23–25. __________ (1997b) ‘Memorandum for international trade and industry dialogue’ ACCIM Bulletin, Issue No 2/97, May, pp. 27–31. __________ (1999) ‘Performance of the SMIs in the manufacturing sector’ ACCIM Bulletin, Issue No 5/99, December, pp. 28–9. __________ (2001a) ‘Performance of small and medium enterprises’, ACCIM Bulletin, Issue No 4/01, October, pp. 9–10. __________ (2001b) ‘ Position paper on SMIs and a recipe for faster development to meet challenges of globalization and liberalisation’, ACCIM Bulletin No 5/01, December, pp. 10–15. Abdul Rahman Embong (1995) ‘Malaysian Middle Classes; Some preliminary observations’ Jurnal Antropologi dan Sosiologi, no 22, pp. 31–54. __________ (2001) ‘Beyond the Crisis: The Paradox of the Malaysian Middle Class, in Abdul Rahman Embong (ed.) Southeast Asia Middle Classes, Bangi: Penerbit UKM, pp.80–102. Chan, Raymond, Moha Asri Abdullah and Zikri Muhammad (2003), Labour Relations and Regulations in Malaysia: Theory and Practice, Hong Kong: City University of Hong Kong Working Paper Series No 40. Chin Yee Whah (2004), ‘Ethnicity and the Transformation of the Ali-Baba Partnership in the Chinese Business Culture in Malaysia’ in Cheah Boon Kheng (ed.) The Challenge of Ethnicity: Building a Nation in Malaysia, Singapore: Marshall Cavendish International, pp. 54–88 Crouch, Harold (1996) Government and Society in Malaysia, St Leonard’s NSW: Allen & Unwin. Devaraj, Jeyakumar (2002), Speaking Truth to Power: A Socialist Critique of Development in Malaysia, Ipoh: Alaigal. Devi, Letchimi (2005) ‘A victorious conclusion’ Aliran Monthly vol 25, no 2, pp 39–40. Federation of Malaysian Manufacturers (www.fmm.org.my/p_ne_it.asp) Gamba, Charles (1962) The Origins of Trade Unionism in Malaya, Singapore: Eastern Universities Press. George, K (2004) ‘Trade Unions and Politics’ Aliran Monthly vol 24 no 1, pp. 28–30 George, K (2007) ‘Workers prefer dialogue but…’ Aliran Monthly vol 27 no. 5, pp. 16–18

242

Gomez E T (1994) Political Business: Corporate Involvement of Malaysian Political Parties, Townsville, Qld: Centre for Southeast Asian Studies, James Cook University. Gomez, E T (2004) ‘Affirmative Action and Enterprise Development in Malaysia’, in R Mason and Ariffin Omar (eds) The Bumiputera Policy: Dynamics and Dilemmas (special issue of Kajian Malaysia, vol 21, nos 1&2, pp. 89–104. Hadiz, Vedi (2003) ‘Changing State-Labour Relations in Indonesia and Mlaysia and the 1997 crisis’. In A Heryanto and S Mandal (eds) Challenging Authoritarianism in Southeast Asia, London: RoutledgeCurzon), pp. 90–116. Heng Pek Khoon and Sieh Lee Mei Ling (2000) ‘The Chinese Business Community in Peninsular Malaysia, 1957–1999’. In Lee Kam Hing and Tan Chee Beng (eds) The Chinese in Malaysia, Singapore: Oxford University Press, pp 123–68. Jesudason, James (1990) Ethnicity and the Economy: The State, Chinese Business and the Multinationals in Malaysia, Singapore; Oxford University Press. Jomo K S and P Todd (1994) Trade Unions and the State in Peninsular Malaysia, Kuala Lumpur: Oxford University Press. Jomo, K S, Khoo Boo Teik and Chang Yii Tan (1996) ‘Vision, Policy and Governance in Malaysia’, in Leila Frischtak and Izak Atiyas (eds) Governance, Leadership and Communication, Washingdon DC: Woprld Bank, pp. 65–89. Khoo Boo Teik (1995) Paradoxes of Mahathirism, Kuala Lumpur: Oxford University Press. Kua Kia Soong (ed.) (2001) People Before Profits: The Rights of Malaysian Communities in Development, Petaling Jaya: Suaram Komunikasi. Loh, Francis Kok Wah (1988) Beyond the Tin Mines, Singapore: Oxford University Press Loh, Francis Kok Wah (2001) ‘Where has (Ethnic) Politics Gone?: the Case of the Bn Non-Malay Politicians and Political Parties’ in Robert Hefner (ed.) The Politics of Multiculturalism: Pluralism and Citizenship in Malaysia, Indonesia and Singapore, Honolulu: University of Hawai’i Press, pp .183–203. Malaysia, Annual Economic Report, Kuala Lumpur: Ministry of Finance (various years) _______, Annual Survey of Manufacturing Industries, Kuala Lumpur: Department of Statistics (various years) _______. Eighth Malaysia Plan 2001–2005, Kuala Lumpur: Percetakan Nasional Malaysia Bhd. _______ (1998) Labour Force Survey Report – Malaysia 1997, Kuala Lumpur: Department of Statistics.

243

_______ (2000) Labour Force Survey Report – Malaysia 2000, Kuala Lumpur: Department of Statistics. ________ , Labour Indicators, Kuala Lumpur: Ministry of Labour/Ministry of Human Resources (various years). _________ (1985) Ministry of Labour Annual Report 1985, Kuala Lumpur: Dept of Trade Union Affairs. ________ (2007) Ninth Malaysia Plan 2006–2010, Kuala Lumpur: Percetakan Nasional Malaysia Bhd. Malaysian Employers Federation (2000) Annual Report – 2000, Kuala Lumpur: Percetakan Nasional Malaysia Bhd. _______ (2005) ‘The Employer’s Perspective: Migrant Workers and Malaysia’s Labour Needs’ Paper presented at the UNHCRRoundtable on Migration and Refugee Issues, 13–14 June 2005, Kuala Lumpur. (presented by MEF Industrial Relations Consultant Deepa Ramachandran) ________ (www.mef.org.my/public’aboutmef_history.aspx) Malaysian International Chamber of Commerce and Industry (2007)’Political and Economic Perspectives of Migration in Malaysia’ Paper presented at the UNHCRRoundtable on Migration and Refugee Issues, 13–14 June 2005, Kuala Lumpur. (presented by Stewart Forbes, MICCI Exec Director) Malaysian Trade Union Congress Annual Report (various years) ________ (www.mtuc.org.my) Maznah Mohamed (2002) ‘At the Centre and the Periphery: The Contribution of Women’s Movements to Democratization’, in Francis Loh Kok Wah and Khoo Boo Teik (eds) Democracy in Malaysia: Discourses and Practices, Richomnd, Surrey; Curzon, pp. 216–40. Moha Asri Abdullah (2001) ‘Economic Growth and Foreign Labour in Malaysia’ in Fatimah Wati Ibrahim and Norehan Abdullah (eds) Issues on Economic Growth and the Quality of Life in Malaysia, Sintok: Penerbit Universiti Utara Malaysia, pp. 49–68. Ng, Cecilia (2004) ‘Women Workers in Malaysia 1980–2004’ Parts 1 and 2, Aliran Monthly vol 24 no 4, pp. 9–12 and vol 24 no 5, pp. 24–25. Ramachandran, S (1994) Indian Plantation Labour in Malaysia, Kuala Lumpur: Institute of Social Analysis. Ramasamy, P (1994) Plantation Labour, Unions, Capital, and the State in Peninsular Malaysia, Kuala Lumpur: Oxford University Press. Rohana Ariffin (1994) ‘Assessing Patriarchy in Labour Organizations’ in Maznah Mohamad and Wong Soak Koon (eds) Feminism: Malaysian Critique and Experience. Special Issue of Kajian Malaysia, vol 12, nos 1&2, June/December, pp. 47–72.

244

__________ (1997) Women’s Participation in Trade Unions in Peninsular Malaysia with Special Reference to MTUC and Cuepacs, Penang: Universiti Sains Malaysia Press. Rowley, Chris and Mhinder Bhopal (2003) ‘The Ethnic Factor in State-Labour relations: The case of Malaysia’, Race and Class No 88, pp 87–115. Saravanamuttu, J (1992) ‘The State, Ethnicity and the Middle Class Factor’ in K. Rupesinghe (ed.) Internal Conflict and Governance, New York: St Martin’s Press, pp. 44–64. Shamsulbahriah Ku Ahmad (2003) ‘ Malaysia after the Asia Crisis’ In Colin Barlow and F rancis K W Loh (eds) Malaysian Economics and Politics in the New Century, Cheltenham: Edward Elgar, pp. 46–61. Stenson, Michael (1970) Industrial Conflict in Malaya, London: Oxford University Press. Todd, Patricia and Mhinder Bhopal ( 2001? ) ‘Trade unions, segmentation and diversity: the organizing dilemmas in Malaysia’ In Fiona Cogan and Sue Ledwith (eds) Gender, Diversity and Trade Unions: International Perspectives, London: Routledge. pp73–94. Syed Shahrir Syed Mohamud (2006) Pekerja Malaysia: Terpinggir di Bumi Kaya! [Malaysian Workers: Marginalized in a Rich Land!], Petaling Jaya: SIRD ___________ (2007) ‘Protection of migrant and Refugee Rights in Malaysia’, in Proceedings of the Conference on the Challenges of Global Migration and Forced Displacement, 1–2 August 2006, Kuala Lumpur: United Nations Malaysia, pp. 73–78. Syed Shahir and G Rajasekaran (2007) ‘Minimum wage and Cola now!’ Aliran Monthly vol 27 no 5, pp.12–15. Veerasenan (2000) ‘Breakthrough in Klebang’, Aliran Monthly, vol 20, no 11/12, pp. 16–17. Weiss, Meredith and Saliha Hassan (eds) (2003), Social Movements in Malaysia, London: RoutledgeCurzon. Wu Min Aun (1982) The Industrial Relations Law of Malaysia, Kuala Lumpur: Heinemann.

245

CHAPTER 7

Developmental State Capacity and Institutional Reform

Abdul Rahman Embong

Development, state capacity and reform are three key issues that are closely

intertwined with the fate of any developing nation. Emerging from the throes of colonialism some 50 years ago, Malaysia has made development its national goal in order to raise the people’s standard of living and bring material and social progress as a way of catching up with the developed West and redeeming national dignity. Since Independence in 1957, Malaysia has had an impressive record of bringing about development and material well-being to her people. Having emerged as a high middle-income country, Malaysia has met all but one of the United Nations Millennium Development Goals (MDGs) and has recently moved up from medium human development to high human development based on the Human Development Index used by the United Nations Development Programme (UNDP). The national goal, since former Prime Minister Mahathir Mohamad proclaimed his Vision 2020 in 1991, is to achieve developed nation status by 2020.

In terms of fighting poverty, Malaysia is considered to be a success story. In 1971, when the New Economic Policy (NEP) was launched (see Chapter 1), half the country’s households were in poverty, with the official poverty rate being a high 52.0 per cent. However, official statistics show that 30 years later, the level had fallen to 8.5 per cent or 409,300 poor households in 1999 and 5.7 per cent or 311,300 households in 2004. It is planned to reduce the poverty level to 2.8 per cent by 2010, and completely eradicate hard core poverty by then. Nevertheless, the government cannot simply regard its campaign against poverty to be completely victorious, because the fight against poverty is getting more complex given the changing conditions with new poverty and social inequality being an emerging phenomenon. To facilitate implementation of the anti-poverty programme, the government set up a national poverty data base under the Ninth Malaysia Plan (2006-2010) to improve the quality of the data and information on poor and hard core poor households. At the same time, the government developed “poverty-mapping” of selected urban and rural areas to help design anti-poverty programmes (Malaysia 2006: 34-35). I. Institutions and reforms

What are the factors responsible for Malaysia’s relative success as a developing country? The success can be attributed to a complex of factors, one of which is the crucial role of the state in bringing about the country’s rapid economic growth, development and social transformation. However, the nation’s lofty development goals would remain mere exhortations if the state leaders lacked vision and the political will to translate such vision into appropriate policies and plans, and if the state did not have the capacity to implement those. State capacity, comprising material and technical capacity and human expertise, is taken to mean the ability, efficiency and effectiveness of the state through its institutions and personnel to craft plans and policies, mobilize resources, attract foreign investment, manage markets, engage with the society, and deliver the public goods in keeping with the national goals. State autonomy, defined

246

simply as the relative absence of external and domestic constraints, is in many ways an enabling factor for such a capacity to take effect. State capacity is multifaceted, the most important being planning capacity, resource capacity, and implementation capacity. These three dimensions of capacity ensure that appropriate policies and institutions can be put in place in order to work towards achieving the desired national goal.

Nevertheless, at least two problems need to be highlighted. As shown by Max Weber, institutions tend to develop inertia and become bureaucratized, trapped within their own rules and regulations, creating what he termed as “the iron cage of bureaucracy”. Attendant problems, namely, corruption, abuse of power and red tape tend to set in, creating a negative impact upon state capacity. Even policy not grounded in strong evidence-based research can become incongruent with reality or can easily be overtaken by events. Policies are often imposed top-down, based on leaders’ political calculations and strategies, and planners’ perceptions of reality, without necessarily taking into account various stakeholders’ points of view and interest, thus creating not only a ‘reality gap’ but also a gap with stakeholders. Here, the requisite sense of ownership of the policies and plans could not possibly develop among the stakeholders who perceive such plans and policies to be ‘elite-owned’. Owing to these reasons, policies and institutions must be reviewed periodically and reform undertaken to re-energise state capacity and make policies and institutions not only more dynamic and relevant but integrated with the relevant stakeholders. These are some of the useful and important lessons that can be drawn from Malaysia’s experience in the last 50 years in enhancing state capacity and undertaking reform that have an impact on poverty reduction in the country.

In the main, there are three kinds of reform – reform of policy, reform of institution, and reform of personnel. Policy reforms attempt to change or modify existing policies and approaches to suit changing conditions and achieve the broad national objectives set by the state. These goals are typically set out in the five-year plans produced since 1950, and continued with greater vigour and zest after Independence. These goals can also be put forward during the inter-plan years to be incorporated into subsequent plans.

Institutional reform and the reform of personnel are important because institutions and personnel are tools or mechanisms to implement policies and plans to achieve their objectives and targets. Indeed, policies and plans are useless without the implementing institutions and personnel because all the three are closely interconnected. Some policy objectives and targets are implemented by existing institutions. Or, if existing institutions are inadequate or outmoded, they might be merged or shut down, and new ones can be set up. Besides being caught in inertia and red tape, thereby impeding implementation, the tasks of various institutions and personnel sometimes overlap for want of clear demarcation of their scope of work or jurisdiction. Over time, personnel can also become unmotivated, losing commitment and focus. These circumstances call for the reforms of institutions and personnel which take the following forms:

• changes within institutions – of procedures, rules and regulations – setting key performance indicators

• retraining or retooling of personnel, transfers, and other administrative actions including removal of personnel

• revamping existing institutions by redefining their core areas of competence • closing down or merging outmoded and non-performing institutions, and • setting up new ones when there are urgent and justifiable reasons.

247

Within the above framework, and taking Malaysia as a case study, this chapter discusses the importance of state capacity in development, state policies and institutions and their effectiveness and reforms that bear positively on poverty reduction. The chapter addresses three key questions:

1. If states are to play an active and effective role in development and poverty reduction, what kinds of institutions and policies may be needed?

2. What lessons of state building can be learnt from successful developmental states and late industrializers?

3. What are the strengths and limits of current state reforms in promoting development and improving delivery of services that impact favorably on the poor?

II. Nature of the Malaysian state

One central yet highly contested concepts of social science is the concept of the state. Theories of the state are full with controversy (Held 1983: 1) that lies beyond the scope of this chapter. Here, the ‘state’ is taken to mean the whole array of power institutions that have jurisdiction over the territory and its populace, and the legitimacy to use force and institute other forms of governance over its citizens and various sectors of society. The state comprises institutions such as the executive and the branches of its administrative machinery, the legislature, the judiciary, and state apparatuses such as the military, police, prisons, as well as official and semi-official media. The government of the day is theoretically not part of the state because it comes and goes, all the more so in a democratic system where voters elect or change the government periodically. In practice, however, the government often arrogates to itself the powers and sanctity of the state, conflating itself with the state. This is often the case in countries such as Malaysia that have had a powerfully entrenched central government ruling uninterruptedly for several decades.182 As will be shown below, such a situation bears advantages and disadvantages for state capacity and institutional reforms, and their impact on poverty reduction.

Malaysia is a federal state with a three-tier governmental structure – a strong

centralized federal government, 13 state governments, and 144 local governments (also known as local authorities). The Federal Government collects taxes and revenues, and controls state funds under the Ministry of Finance which disburses them to federal ministries and agencies, State governments and local authorities. The State and Local Governments are empowered to collect taxes or rates within their respective jurisdictions. Under the Federal Constitution, the Federal Government has jurisdiction over many aspects of state functions, including economic development, health, education, security, defence and immigration. But each State Government has control over land resources in its State. States with traditional rulers or sultans have jurisdiction over matters pertaining to Islam and Muslims within their territories. Within the two East Malaysian States of Sabah and Sarawak, the State Governments have additional powers over immigration and labour.

Since 1957, the Federal government and almost all the State governments have

been formed by the ruling coalition (Alliance from 1957 to 1969, and Barisan Nasional,

182 For a discussion of the character of Malaysia as a developmental state, see Abdul Rahman (2008).

248

BN, or National Front since then). Only Kelantan (1959–74, and since 1990), Trengganu (1959–62, and 1999–2004), Penang (1969–1974) and Sabah (notably 1984–1994) have been ruled by opposition parties. In several instances, the relevant opposition parties later joined BN. Of late, more so since the Reformasi of 1999, a sea-change has taken place in the political landscape, bringing to the fore issues of democracy, integrity, transparency, accountability and human rights. This was most evident at the 12 general election of 8 March 2008 which brought a historic shift in the power relations when the Opposition came to power in five states (Kelantan, Penang, Kedah, Perak and Selangor) while BN lost its seemingly unbreakable two-thirds majority control of Parliament.

Various authors have described the nature of the state in Malaysia differently. As Abdul Rahman (2002: 45) has noted, some regard it as a Bumiputera or an ethnic hegemonic state, with the Constitution being “a first step toward the consolidation of a Malay State [and] the New Economic Policy (NEP) as a supplemental strategy for achieving that political ideal” (Ho 1997: 217). Others (for example, Hua 1983) regard the state to be capitalist, and ethnicity as only a mask or instrument for advancing class interests. The class that controls the state has been variously called ‘administocracts’ (Chandra 1979), ‘statist capitalists’ (Jomo 1986), and ‘bureaucratic bourgeoisie’ (Brown 1994).

Divergent views are also found in the analysis of the state system. Although the

state practises parliamentary democracy and holds regular elections, the latter are considered neither fully fair nor free, and subject to gerrymandering and vote-buying (Puthucheary and Norani 2004). Hence, some authors have characterized the system as ‘authoritarian’, ‘semi-democratic’, ‘quasi-democratic’, or ‘pseudo-democratic’; others, notably Crouch (1996), regard it as ‘neither authoritarian nor democratic’, being repressive and yet responsive at the same time. This chapter holds that the Malaysian state is a complex entity that does not fit easily into any of the above terms. On the one hand, it would appear to be authoritarian or repressive, given that it is armed with many repressive laws such as the Internal Security Act (ISA) which allows detention without trial, the Emergency Ordinance, the Sedition Act, the Printing Presses Act, and so on. On the other hand, the Federal Constitution enshrines guarantees of human rights and freedom of expression, of assembly, and of religion, and spells out to some extent the separation of power between the executive, legislature and the judiciary. The judiciary was known to be independent under the leadership of an earlier batch of top judges. But the executive under Mahathir curtailed it, crucially when the then Lord President, Tun Salleh Abbas, was removed from office in 1988.

Besides, an authoritarian state would mean the absence or a denial of a

competitive democratic system. This is not so with Malaysia: the state practises a parliamentary democracy, originally based on the Westminster model, with competing political parties although the playing field is not level and the ruling BN enjoys many advantages. General elections have been held regularly, the twelve on 8 March 2008. Further, while maintaining its repressive nature, the state in its actions is responsive in many ways to domestic and international pressures and demands. However, the extent of its responsiveness or lack of it depends a great deal on the character and ideology of the ruling elite in a particular period, the make-up of its popular support, and the pressures impacting upon the elite from different directions. In short, much depends on how far substantive democracy and civil society have grown, and they have grown quite noticeably in the last decade.

249

It is sometimes perplexing how the state can manage this ‘repressive-responsive’ tension and paradox. Brown (1994) offers an interesting theoretical explanation, that is, the state – while functioning in the interests of international capitalism – must mediate and balance the interests of various classes and fractions within them. Bureaucrats must employ state machinery in ways which are responsive to various class interests, not merely promote their own interests or those of the dominant class. Thus, compromises with other groups and classes in society must constantly be made to maintain the smooth running of the system.

There is another related explanation, one which is very much shaped by

Malaysia’s history, multiethnic society and its political economy. The politically dominant Malay elite were economically weak when they took power in 1957. Access to and control of the private sector and wealth were concentrated in the hands of foreign (mostly British) capital and, to some extent, domiciled Chinese capital. As part of the Independence pact with the British, UMNO was not meant to rule on its own but through power-sharing arrangements with other ethnic-based parties (Malaysian Chinese Association and Malaysian Indian Congress). Thus ethnic power-sharing was institutionalized in the form of a coalition, the Alliance which was expanded in 1974 into the BN (currently 14-party coalition). Despite being relatively weak economically, the UMNO elite had legitimacy and support from the Malay masses and from substantial sections of the non-Malays, and the state it controlled had some degree of autonomy from foreign and Chinese business groups (Jesudason 1989). These were some critical factors that enabled the UMNO-based state elite to adopt a strong developmentalist role from 1970 through the NEP. The state’s developmentalist nature can be seen from the NEP’s twin objectives (see Chapter 1). One of the state’s strategies was to create a Malay capitalist class and a Malay new middle class of professionals and administrators as a counterweight to the non-Malay, especially Chinese capitalist and new middle classes (Abdul Rahman 2002: 47-48).

The above paradox and the logic behind it, historical conditions and the ideology

of the Malay ruling elite explain why and how the state became ‘developmentalist’, effecting development and social transformation over the past five decades. The unprecedented conditions of that period created a space and an opportunity to restructure the rules of the game, in terms of strategies and policies, to be relatively independent of earlier constraints imposed by foreign and domestic forces. Thus, the state was transformed from being basically laissez faire to developmentalist. Much research can been conducted on the state’s involvement in the economy and industrialization (Jomo 1986, Jesudason 1989, Lubeck 1982, Gomez 1997, and Ishak 1999), in creating new social groups especially the Malay middle class (Saravanamuttu 1989, 2001, Kahn 1996, Abdul Rahman 1995, 1996, 2002), and maintaining developmentalism as state ideology and discourse (Loh 1997, Saravannamuttu 2001, Loh 2002, Saravanamuttu and Loh 2004). However, important questions remain to be answered about how origins of the developmentalist state, state capacity and its transformation, and policy reform over time.183

III. State capacity: Policy formulation, planning and implementing institutions 183 See Abdul Rahman (2008); So far there is only an unpublished PhD thesis, by Sity Daud (2003), submitted to Universiti Kebangsaan Malaysia, which directly addresses Malaysia as a developmental state by examining the state’s role in the implementation of the NEP and the National Development Policy (1991-2000).

250

Arrogating to itself the task of development, the state has been a usable instrument to realize development goals. The state remains developmentalist, equipped with the necessary capacity for development, but more recently tending to become a ‘regulatory’ state. State capacity may be examined from three related dimensions – planning, resource and implementation, and the related policies and institutions. This section analyses planning and implementation, their key ministries and agencies, and the state’s resource capacity – revenue, development allocation and financing – in relation to the state’s goals. It then analyses the institutions directly involved in development, and particularly in poverty eradication. It is proposed that the state has been able o formulate policies and plans, modify them when the need arose, create institutions to implement the policy objectives and programmes, and increase revenue and allocate sufficient funding for projects carried out by various institutions. The policies and plans and the implementation by ministries and agencies have undoubtedly brought about important results although the process has revealed the dark side of planning and development: bureaucratic red tape, inefficiency, corruption, etc. (to which the final section of this chapter will return). State Administrative Machinery In 2006, the population was 26.7 million. The total work force was 10.63 million, made up of 10.3 million being gainfully employed and 353,600, or 3.4 per cent unemployment. The state was the single biggest employer. As a percentage of total employment, public sector employment grew from 12.0 per cent in the early 1970s to a peak of 15.0 per cent in 1981 due to rapid state expansion. However, it declined to 12.5 per cent in 1991 due to the privatization of the 1980s. 184 In absolute terms, state employees numbered 398,000 or 11.9 per cent out of a total workforce of 3.34 million in 1970, 692,000 or 14.4 per cent of total employment in 1980, and 850,000 or 12.9 per cent in 1990 (Rugayah 1995: 65; Abdul Rahman 2002: 53). Today, the proportion is 12.3 per cent or about 1.27 million out of the 10.3 million work force. In terms of the size of the gross domestic product (GDP), based on 2005 figures, it stood at RM494,544 million compared to RM12,308 million in 1970, a fortyfold increase. In terms of GNP per capita, it increased by almost 17 times from RM1,054 in 1970 to RM17,687 today and is expected to increase further to RM23,573 by 2010 (Table 1).

Table 1 GDP, GNP, GNP Per Capita and Population, 1970–2010

1970 1980 1990 1995 2000 2005 2010* GDP at purchasers’ value (RM million)

12,308

26,188

115,701

213,729

343,215

494,544

722,219

GNP at purchasers’ value (RM million)

11,953

25,444

110,637

202,474

314,306

473,074

682,677

GNP per capita at purchasers’ value (RM)

1,054

1,836

6,099

9,786

13,378

17,687

23,573

Population (mil.) 10.9 14.3 18.0 20.7 23.3 26.0 30.0 *Targeted figure Source: Malaysia (1976, 1981, 1991, 1996, 2001, 2006). 184 The privatization exercise saw about 113,200 public sector employees being transferred to the private sector between 1983 and 2005 when many government agencies, especially those involved in utilities, were turned into private sector entities. Privatization reached its peak between the mid-1980s and mid-1990s. During the 2001–2005 period, it slowed down considerably, with only 6,749 employees being transferred (Malaysia 2006: 227).

251

The executive arm of the state is the Cabinet appointed by the King and headed by the Prime Minister. To Cabinet is served by different branches of the civil service. The officer corps, Perkhidmatan Tadbir dan Diplomatik (PTD, or the Administrative and Diplomatic Service) constitutes the elite of the civil service. It is headed by the Chief Secretary to the Government who also serves as Secretary to the Cabinet, assisted by Secretaries-General of ministries and Directors-General of agencies (Figure 1). Positions in the civil service have been prized and much sought after. Those intending to join the PTD must generally possess a good university degree. The selection process is conducted by the Public Services Commission (PSC) while the terms and conditions of employment and promotion are set by the Public Services Department (PSD). The PTD officers may be transferred from one ministry or agency to another, horizontally, or vertically in cases of promotion. While the PTD entry requirement is the same for all ministries, departments and agencies, the criteria for promotion include a multiplicity of factors related to seniority and merit. It is the PTD-manned ministries and agencies that serve as the planning, coordinating and implementing institutions of the developmentalist state.

252

Figure 1 Administrative Structure of the Federal Government under the Prime

Minister’s Cabinet While the Federal Government has its centralized bureaucracy, the thirteen State governments have their own State bureaucracies, called the State civil service, comprising departments and agencies serving their respective functions. In the main, each State civil service, headed by the State Secretary, is a closed service (although some Federal officers serve in the State service). Planning and Implementing Ministries and Agencies

Developmentalism has virtually been part of state ideology and development planning preceded independence; the colonial administration introduced it in 1950 as part of its counter-insurgency programme. Malaysia has adopted five-year plans since the 1950s and long-term perspective plans – the First Outline Perspective Plan (1971-1990) associated with the NEP, the Second Outline Perspective Plan (1991-2000), and the Third Outline Perspective Plan (2001-2010). Throughout the country’s history, the most important instrument directing policy formulation, planning, coordination, and implementation is the Prime Minister’s Department (the largest ministry today) under which is an array of departments and agencies.

To facilitate planning at the Federal level, a range of central planning and coordinating agencies operate within the Prime Minister’s Department, namely the

Cabinet under the Prime Minister

Public Services Commission –

headed by Chairman

(Recruitment)

Public Services Department –

headed by Director-General

(Personnel)

Prime Minister’s Department

e.g. EPU, ICU

(Planning & Coordination)

-Ministries (headed by

Secretary-General) -Agencies (headed

by Director-general)

(Implementation)

Chief Secretary to the Government

Public-Private sector Joint Task Force (PEMUDAH) (jointly chaired by Chief

Sec. to Govt. & Private sector leader

253

Economic Planning Unit (EPU), the Implementation and Coordination Unit (ICU), the Public Services Department (PSD), and the Malaysian Administrative Modernisation and Manpower Planning Unit (MAMPU). (Until the 1990s, there was an additional unit called the Socio-Economic Research Unit or SERU, but this was disbanded and its functions were taken over by the EPU). In addition, there are the Treasury, and Bank Negara Malaysia (Central Bank of Malaysia) and the planning cells of the ministries (Malaysia 1981: 187). At the State level, the State Economic Planning Units (SEPUs) (modeled after the Federal EPU) and State Development Offices established since the 1970s are responsible for formulating state development strategies and coordinating the preparation of State development projects and programmes (Malaysia 1981: 187).

254

FIGURE 2 ORGANISATIONAL LINKS BETWEEN THE NATIONAL PLANNING

COUNCIL AND THE ECONOMIC PLANNING UNIT, PRIME MINISTER’S DEPARTMENT

* Members of NPC: Senior Cabinet Ministers chaired by the Prime Minister. ** Members of NDPC: Top officials of economic development ministries & agencies *** As Secretariat, EPU plays a pivotal role in providing inputs as well as putting together the decisions and plans debated at both the NPC (ministerial) and NDPC (top officials’) levels.

Special mention should be made of the EPU, a central planning agency that had evolved from an economics department of the Treasury during the British period into the most powerful planning agency under the Prime Minister’s Department. The EPU has been instrumental in drafting the NEP, other long-term perspective plans, and all the five-year plans. Manned by professional economists, EPU was first headed by Professor William T. Phillips from Johns Hopkins University (on secondment to EPU under the

NATIONAL DEVELOPMENT PLANNING COMMITTEE (NDPC)** Chair:

Chief Secretary to the Government

NATIONAL PLANNING COUNCIL (NPC)* Chair:

Prime Minister (or Deputy Prime Minister)

SECRETARIAT to NDPC ECONOMIC PLANNING

UNIT***

255

United Nations Opex Scheme). However, from 1978 on, EPU’s leadership was taken over by a Malaysian economist, and its staff of economics experts was also Malaysian. The EPU reviews and assesses government procurement documents and gives its technical evaluation. The EPU directly supervises the work of the Statistics Department which conducts a nation-wide population census every ten years, and other policy studies such as the household income sample surveys, labour force surveys, and so on. Given the EPU’s strategic importance, the Prime Minister assigns a trusted Cabinet minister in the Prime Minister’s Department to oversee its daily operations and to report periodically to him.185

The EPU serves as the secretariat to the National Development Planning

Committee (NDPC) (Figure 1), chaired by the Chief Secretary to the Government. The NDPC members consist of top officials of major development ministries and agencies. Directly above the NDP is the National Planning Council (NPC), the highest planning body, chaired by the Prime Minister and/or Deputy Prime Minister, with its members consisting of senior Cabinet ministers. Besides the Prime Minister’s Department, a number of ministries play crucial roles in ensuring the success of planning and implementation by ensuring the state has the resource capacity. The most significant of these is the Ministry of Finance (or Treasury) under whom comes Bank Negara Malaysia (Central Bank of Malaysia), and the departments and agencies responsible for collecting taxes and revenues, such as the Customs Department and the Income Tax Board. The Finance Ministry through its investment arm, the Khazanah Nasional Berhad (or Khazanah), oversees the government-owned companies, or what are today known as government-linked companies (GLCs). The Finance Ministry ensures resources are available for the operating and development expenditures of the government, and prepares the annual budget. The Finance Ministry has two oversight bodies, namely the Accountant-General and the Auditor-General, to ensure that money is allocated and spent in accordance with financial procedures.

Given the importance of the Finance Ministry, its minister has always been appointed from trusted senior UMNO stalwarts (except during the early Independence years when the ministry was held by two MCA leaders consecutively). After the 1997-98 Asian financial turmoil that led to a political fallout between Prime Minister Mahathir and Finance Minister, Anwar Ibrahim, Mahathir took over the Finance Ministry he retired in October 2003. His successor, Prime Minister Abdullah Ahmad Badawi, also assumed the post of the First Finance Minister but, like Mahathir, Abdullah took charge of policy matters while a Second Finance Minister, Nor Mohamed Yakcop, formerly a top official of Bank Negara and economics advisor to the Prime Minister, managed the day-to-day affairs of the Ministry. 185 The last three planning ministers in charge of the EPU were an economics expert, a successful businessman and a highly respected banker. When the economics expert, Mustapa Mohamed, was appointed Minister of Higher Education in 2005, he was succeeded by Norwawi Effendi, a businessman. After the 8 March 2008 general election, Amirsham Abdul Aziz (a successful top banker, who resigned his post as the CEO of Malaysian largest bank, Maybank) was appointed to take charge of the EPU.

256

Resource Capacity 1: Revenue and Its Sources

Financial resources in the form of revenue, savings and investments constitute a very critical component of state resource capacity. The most important source of government revenue is taxation, direct and indirect, which generally constitutes more than 85 per cent of all state revenue. Other revenue sources are excise duties, royalties and other non-tax sources. As the data in Table 2 shows, resources for the critical period of the 1970s were quite ample. Government revenue increased more than five times in ten years from RM2,861 million in 1970 to RM15,048 million in 1980, or at an annual rate of 16.7 per cent from 1971 to 1975, and 20.5 per cent from 1976 to 1980. The growth in revenue contributed significantly to the government’s coffers and development efforts. The increased revenue reflected a growing economy and the increased capacity of agencies such as the Inland Revenue Department and the Royal Customs Department to collect taxes and duties.

257

Table 2 Revenue of the Federal and State Governments 1970-80 (RM million)

Average annual growth rate (%)

1970 1975 1980 1971-75 1976-80 1971-80

Direct taxes .. .. .. ..

701

2,021

5,466

23.6

22.0

22.8

(i)Income taxes .. .. .. 657 1,926 5,121 24.0 21.6 22.8 -Individuals .. .. .. 168 438 1,250 21.1 23.3 22.2 -Companies .. .. .. 489 1,166 2,276 19.0 14.3 16.6 -Petroleum .. .. .. - 322 1,595 - 37.7 -

(ii) Petroleum royalties/cash payments - 78 295 - 30.5 - (iii)Others .. .. .. 44 17 50 -17.3 24.1 1.3 Indirect taxes .. .. ..

1,299

2,555

6,457

14.5

20.4

17.4

(i)Export duties .. .. .. 258 625 2,420 19.4 31.1 25.1 -Rubber .. .. .. 80 121 1,035 8.6 53.6 29.2 -Palm Oil .. .. .. 18 282 232 73.4 -3.8 29.1 -Tin .. .. .. 130 195 470 8.5 19.2 13.7 -Crude petroleum.. .. .. - - 650 - - - -Others .. .. .. 30 27 33 -2.1 4.1 1.0

(ii)Import duties and surtax .. 557 801 1,686 7.5 16.1 11.7 (iii)Excise duty .. .. .. 249 450 994 12.6 17.2 14.9 (iv)Sales tax .. .. .. - 272 647 - 18.9 - (v)Road tax .. .. .. 169 241 378 7.4 9.4 8.4

(vi)Others .. .. .. 66 166 332 20.3 14.9 17.5 Non-Tax Revenue .. .. ..

400

541

947

6.2

11.9

9.0

Total Federal Government Revenue .. 2,400 5,117 12,870 16.4 20.3 18.3

State Governments Revenue .. .. 461 812 2,178 12.0 21.8

16.8

Total Federal & State Governments Revenue .. .. ..

2,861

5,929

15,048

16.7

20.5

18.1

Source: Malaysia 1981

258

Table 3 Federal Government Revenue 1980-2010

Cumulative Revenue

Revenue

1980

1985

1990

2000

2005

2010 1986-90 2001-05 2006-10

Total

(RM m)

15,046

21,861

31,234

61,863

106,304

153,070

130,428

461,390

683,137

% of

GDP

57.0

29.0

26.3

18.0

21.5

21.0

7.4*

11.4*

7.4*

*Average annual growth rate Source: Malaysia (1986, 2001, 2006)

Likewise, the decade, 1980-1990, saw an increase in revenue. Total government

revenue rose from RM15,048 million in 1980 to RM21,861 million in 1985 and RM31,234 million in 1990 (Table 3). The annual growth rate between 1986 and 1990 was 7.4%. The cumulative revenue for 1986-1990 was RM130,424 million (Malaysia 1991: 280). Revenue as a proportion of GDP declined considerably in 2000 because of the East Asian financial crisis, but cumulative revenue continued to rise in 2000-2010 to RM461,390 million for 2001-2005 and RM683,137 million for 2006-2010. The annual growth rate of revenue was 11.4 per cent for 2001-2005 but was expected to fall to 7.4 per cent for 2006-2010.

One major source of revenue is petroleum (taxes, duties and royalties). The

discovery of oil off the shores of the Terengganu and Sabah in the 1970s was a big boost particularly with the establishment of the state oil corporation, Petroliam Nasional Berhad (Petronas) in October 1974. From 1976 revenue from petroleum sources grew fastest. In 1976, Petronas and the major oil companies operating in Malaysia (such as Shell and Esso) signed Production Sharing Agreements outlining the distribution of oil production between the two parties (Malaysia 1981: 14). In 1975, Petronas, with the foreign oil companies, contributed RM322 million to government revenue. By 1980, the contribution had increased to RM1,595 million (at an annual growth of 30.5 per cent). The significance of petroleum revenue can be clearly seen from Table 4. For 1981-85, revenue from petroleum sources was RM26,528 million or 28.3% of total revenue (Malaysia 1986: 264). Despite the economic downturn of the mid-1980s, the petroleum contribution increased; it was RM30,475 million or 26.8 per cent of total revenue for 1986-90. And, for 1991-95, total revenue from petroleum sources was RM40,820 million, made up of direct taxes (RM14,890 million), indirect taxes RM7130 million, and royalties making up another RM18,800 million (Malaysia 1991: 68, Table 2-6). This was a big increase from the previous five years even though its proportion of total state revenue fell to 19.0 per cent mostly because of the increase in revenue from other sources. For 1996-2000, an increase in oil prices raised the revenue from petroleum sources to RM46,868 million although, again, this was a lower proportion (15.6 per cent) of total government revenue.

259

Table 4 Contribution of Petroleum Revenue to

Total Federal Government Revenue 1970-2010 Five-year Plan

Period Total Cumulative Revenue

(RM mil.) Total Revenue from Petroleum (RM mil.)

Petroleum revenue as % of total revenue

1971-1975 n.a. n.a. n.a.

1976-1980 n.a. n.a. n.a.

1981-1985 93,770 26,528 28.3

1986-1990 130,428 30,475 26.8

1991-1995 215,393 40,820 19.0

1996-2000 301,267 46,868 15.6

2001-2005 396,748 68,110 17.2

2006-2010* 683,137 n.a. n.a.

* Projected figure

From the 1970s, therefore, the state had been able to implement its development plans, including their anti-poverty programmes, thanks in part to its strong resource capacity based on increased revenue, especially from petroleum. Although the presence of petroleum was critical, it took the state’s modern institutions to manage the resource. As petroleum reserves decline, however, the state would need to look for other compenstating sources of revenue. Resource Capacity 2: Development Allocation and Financing

The revenues increased because the economy grew steadily (Table 5) and Malaysia did not resort to massive foreign borrowing. Even with recession in 1985-86, the 1980s registering 7.1 per cent growth in 1981-85 period and 6.8 per cent in 1986-90. The highest average annual growth rates were recorded during 1976-80 and 1991-95. In the aftermath of the 1997-98 crisis, however, the growth rate sharply declined to 4.5 per cent in 2001-2005. Projections for subsequent periods targeted higher growth rates again.

Table 5

Development Allocation and Expenditure of Public Sector for Five-Year Plan Periods (RM million) and GDP growth (at current prices)

Original allocation

Revised Allocation

Actual expenditure

% of GNP

GDP average annual growth rate

(%) 1971-75 7,250 11,457 9,901 11.2 6.6 1976-80 18,555 37,651 27,804 14.6 8.5 1981-85 42,830 80,331 78,643 24.1 7.1 1986-90 74,000 64,590 61,850 14.3 6.8 1991-95 104,000 117,658 n.a. 14.8 8.7 1996-2000 162,500 229,292 222,877 11.5 8.0 2001-05 253,355 n.a. 339,777 n.a. 4.5 Source: Malaysia (1991, 1996, 2001, 2006)

Such growth and increased revenue sources enabled the state to finance public

sector development expenditure. As Table 4 shows, development allocations steadily

260

increased after the NEP was launched. While the public sector allocation was RM7,250 million for 1971-75, it was increased six times to RM42,830 million by 1981-85, and fourteen times by 1991-95. Indeed, between the Second Malaysia Plan and the Eighth Malaysia Plan periods, the allocation was increased by 35 times.

Part of the development financing for 1971-80 came from deficit financing, as may be seen from Table 6, a strategy that continues to this day. Given the consolidated revenue and expenditure of the Federal and State governments and the surplus of public authorities, the overall deficit was RM7,556 million during 1971-75 and RM17,101 million during 1976-80, or RM24,657 million for the decade, 1971-80. But much of the deficit was internally financed with domestic borrowing accounting for 58.4 per cent of the overall deficit during 1971-75 and 56.2% during 1976-80. The largest domestic lender to the government was the Employees Provident Fund (EPF) that lent RM6,672 million during 1971-1980.

Table 6 Consolidated Public Sector Expenditure and Financing 1970-1980

(RM million) Cumulative

1971-75 1976-80 1971-80 Government revenue 21,978 54,706 76,684Government current expenditure 20,446 48,723 69,169Current surplus 1,532 5,983 7,515Public authorities’ current surplus 705 1,853 2,558Total public sector current surplus 2,237 7,836 10,073Public sector development expenditure 9,793 24,937 34,730Overall deficit 7,556 17,101 24,657Sources of financing Net foreign borrowing 2,083 3,907 5,990Foreign borrowing as % of public sector development expenditure

21.3

15.7

17.2

Net domestic borrowing 4,414 9,610 14,024Use of accumulated assets & special receipts 1,059 3,584 4,643Source: Malaysia (1981: 132, Table 6-6) In the 1980s, public sector deficit grew tremendously to RM50,889 million for 1981-85, or 16.3 per cent of GNP, and RM50,594 million for 1986-90 (12.7 per cent of GNP). In 1981-90, when Mahathir undertook heavy industrialization, the total deficit was RM101,483 million. Nevertheless, with the high economic growth of the late 1980s and the 1990s, government revenue increased by about 300 per cent, from RM224,194 million in the 1980s to RM646,815 million for 1991-2000. The massive expansion of revenue sharply reduced the deficit to RM6,702 million for 1991-2000, from RM101,483 million for the preceding ten years. Significantly, a strategy of domestic resource mobilization was preferred, thus avoiding excessive reliance on external borrowing. For the Second Malaysia Plan period, for example, net foreign borrowing was RM2,083 million, or 21 per cent of total development expenditure, while for the Third Malaysia Plan period, the amount increased to RM3,907 million but its proportion of total development expenditure decreased to 14.1 per cent.

However, during the 1980s, the proportion of net foreign loan to total

development expenditure increased sharply. For the Fourth Malaysia Plan, development expenditure amounted to RM80,331 million, of which RM26,163 million or 32.6 per

261

cent was financed by foreign borrowing compared to only RM5,990 million or 17.2 per cent in the 1970s (Table 7). But the dependence on external borrowing steadily declined after that: to 22.5 per cent of development expenditure for the Fifth Malaysia Plan, only 1.2 per cent for the Sixth Malaysia Plan, and 1.8 per cent for the Seventh Malaysia Plan. In absolute terms, net foreign borrowing for public sector development went down sharply to RM4,363 million for the 1990s. Even domestic borrowing was reduced to only RM1,747 million. This was possible because Malaysia accumulated huge revenue during those years. Under the Eighth Malaysia Plan (2001-2005), net foreign borrowing increased again to RM7,269 million, while domestic borrowing went up to RM81,057 million, but under the Ninth Malaysia Plan (2006-2010), it went down sharply to RM134 million though domestic borrowing increased to RM106,304 million (Malaysia 2006: 58).

Table 7 Consolidated Public Sector Expenditure and

Financing 1981-1990 and 1991-2000 (RM million) Cumulative

1981-85 1986-90 1981-90 1991-95 1996- 2000

1991- 2000

Government revenue1 93,770 130,424 224,194 267,630 379,185 646815 Government current expenditure

91,890

129,018

220,908

195,965

289,830

485,795

Current surplus 1,880 1,406 3,286 71,665 89,355 161,020 Public authorities’ current surplus

n.a.

5,000

n.a

49,524

76,316

125,840

Total public sector current surplus

29,442

17,000

46,442

121,189

165,671

286,860

Public sector development expenditure

80,331

74,000

154,331

117,658

162,500

280,158

Overall deficit 50,889 50,594 101,483 3,531 3,171 6,702 Sources of financing Net foreign borrowing2

26,163

16,667

42,830

1,410

2,953

4,363

Foreign borrowing as % of public sector development expenditure

32.6

22.5

27.8

1.2

1.8

1.6

Net domestic borrowing

24,263

30,916

56,179

8,408

-6,661

1,747

Use of accumulated assets & special receipts3

468

3,011

3,479

-13,349

537

-12,812

1 Government expenditure includes Federal Government, State Governments, Local Government and Statutory Authorities 2 ( - ) Indicates net repayments 3 ( - ) Indicates build up in assets 1 Government expenditure includes Federal Government, State Governments, Local Government and Statutory Authorities Source: Malaysia (1981: 132 Table 6-6); Malaysia (1991 Table 7-15); Malaysia (1996: 187: Table 6-7) State-owned Enterprises and Economic Development

262

With a strong domestic resource base, the state was able to embark on its intervention strategy by setting up a whole array of institutions, the most important being the state-owned enterprises (SOEs), at the Federal and State government levels. The Ministry of Public Enterprises (since renamed Ministry of Entrepreneur Development), was created in the 1970s solely to oversee the SOEs. Gomez (1997: 29-30) classifies the government-owned enterprises according to three major categories:

1. ‘departmentmental’ enterprises which provide public services, such as water

supply, telecommunications, electricity supply, civil aviation, etc. 2. statutory bodies, or agencies established by law at federal and state levels; the

federal bodies include the Federal Land Development Authority (Felda), Rubber Industry Smallhoders Development Authority (RISDA), Majlis Amanah Rakyat (MARA), Urban Developmnent Authority (UDA), Muda Agricultural Developmnent Authority (MADA), Malaysian Rubber Development Corporation (MARDEC); state bodies include the state economic development corporations (SEDCs)

3. government-owned private or public limited companies established under the

Companies Act 1965 whose equities are fully or partially held by the government; for example, Perbadanan Petroliam Nasional (Petronas), Heavy Industries Corporation of Malaysia (HICOM), and Perusahaan Otomobil Nasional (Proton).

In keeping with the NEP’s objectives, the growth of the SOE sector was

probably the most significant feature of the developmentalist state. In 1960, there were 22 SOEs. Ten years later, there were 109. With NEP implementation the number of SOEs rose to 362 in 1975, 656 in 1980, 1,010 in 1985, and 1,149 in 1992. The SOE expansion peaked in the mid-1970s with over 100 enterprises being set up each year. Most of the SOEs were in services and manufacturing – the fastest growing sectors – followed by finance and agriculture. In services, for example, there were only 13 SOEs in 1970 but 321 two decades later. Likewise, SOEs in agriculture increased from 10 in 1970 to 142 in 1992, while those in manufacturing increased from 40 in 1970 to 315 in 1992. The number of SOEs in finance rose from 17 in 1970 to 137 in 1992 while that for building and construction rose from 10 in 1970 to 121 in 1992 (Gomez 1997; Adam & Cavendish 1995: 16-17; Abdul Rahman 2002). For a fundamentally market-oriented economy, such rapid SOE expansion led some analysts to consider that Malaysia’s SOE sector was among the largest in the world outside the centrally planned economies (Adam & Cavendish 1995: 15). However, from the mid-1980s, Mahathir slowed down the growth of this sector with liberalization, deregulation and privatization measures. Some SOEs have succeeded. Others failed or were riddled with problems. One of the most successful, Petronas, is listed among the Forbes 500 world’s largest companies.

While some SOEs were directly involved in business, others were involved in

development programmes for poverty eradication, and especially in rural areas. The Federal Land Development Authority (Felda), established on 1 July 1956, was one of the most successful in bringing about rural transformation. In the 1970s, Felda rapidly expanded to resettle thousands of landless or land-poor peasants from all over the country in new agricultural settlements producing rubber or oil palm. Each settler was allocated approximately ten acres of agricultural land and a 0.25-acre plot of housing land. The first group of settlers was placed in Felda Lurah Bilut, Pahang, in 1959. There are settlers in 278 Felda schemes throughout Malaysia except Penang and Sarawak (the

263

latter having its own land development schemes). Starting January 1990, Felda has stopped placement of new settlers. As of January 2007 Felda had placed 112,635 settler families in 317 schemes covering 853,313 hectares (Table 8). Of this total, 90,511 settler families (80.4 per cent) were in oil palm areas while another 22,124 or 19.6 per cent were in rubber schemes. Today, 74.9 per cent of the settlers have settled their dues to Felda, and are entitled to ownership of their land.

Table 8 Settler Emplacement in Felda Schemes by State January 2007

No. of settlers State No. of schemes Oil palm Rubber State total % of total

Pahang 115 40,500 2623 43,123 38.3Johor 73 24,483 3,158 27,641 24.5Negri Sembilan

49 6,846 9,583 16,429 14.6

Terengganu 21 7,133 330 7,463 6.6Perak 17 4,154 1,760 5,914 5.3Kedah 10 108 3,077 3,185 2.8Kelantan 11 3,115 0 3,115 2.8Sabah 9 1,649 0 1,649 1.5Melaka 5 801 529 1,330 1.2Perlis 3 0 857 857 0.7Selangor 4 1,722 207 1,929 1.7Total (%) 317 90,511 (80.4) 22,124 (19.6) 112,635 (100.0) 100.0Source: Felda Annual Report 2007

Between 1985 and 1988, Felda guaranteed its settlers a minimum monthly

income of RM350 which was raised to RM600 for 1989-2006. The level of income being fixed, no deduction would be made from it if a settler’s income fell below the fixed level. In 1980, the Felda Investment Cooperative (KPF) was established to provide more income opportunities for members. Every settler is a KPF member, offered a free share of RM500 or a free share of RM1000 if he has settled all loan repayments, and is entitled to receive KPF dividends. Elderly settlers who find it difficult to work on the farms are provided soft, interest-free loans of RM5,000. Each settler is allowed to invest a maximum of RM250,000 in KPF.

Today, more than one million individuals from the settler families live on Felda

settlements with many of these transformed into modern agricultural townships. Felda settlers were sheltered from the 1997-98 financial crisis because rubber and palm oil prices remained stable, and, in fact, palm oil prices in the world market have steadily risen (Ishak and Abdul Rahman 1998). From the younger generation of Felda settlers a number have become professionals and joined the ranks of the new middle class. However, many Felda schemes today face problems of depopulation and ageing labour force because many from the youths have migrated to the cities, leaving behind elderly parents. The state has discontinued the strategy of opening new land due to land shortage and other concerns.

While Felda is generally a successful institution and its schemes have borne

fruit, it has important shortcomings. For example, as Ozay Mehmet (1986) and Sulochana Nair (2007) have noted, the settler selection process was very much influenced by political considerations and rural Malays made up 95 per cent of the

264

settlers. Besides, the ownership of settlement land was a contentious issue. Settlers could only become legal owners after they had paid the settlement costs. Repayment took about 15 years because of high costs averaging RM57,400 per family for rubber schemes and RM40,500 for oil palm schemes. From the government’s point of view, it required more than RM13.3 billion to resettle less than half a million settler families, which was 60% higher than the entire rural and agricultural development allocation for the Sixth Malaysia Plan. From the settler’s point of view, the costs had to be paid over 15 years through deductions from the sale of their produce to Felda. There were complaints that Felda used its profits for business rather than give it back to the settlers. Presently, however, most if not all Felda settlers have repaid Felda and own their land. Looking at the rural sector as a whole, while they had given a higher living standard to the settler families, the Felda schemes tended to accentuate rural inequality: Felda was effective in eradicating poverty among its settlers but its targets did excluded those in traditional non-Felda villages.

Hence, although the Felda strategy of land development and settlement is often

presented as the showpiece of Malaysia’s rural development, it has had “differential impacts on poverty groups” (Nair 2007: 122-123). Moreover, Felda was able to raise the settler’s income level between three and ten times their original levels, but unable to address international price volatilities. To that extent, income differentials between settlers on rubber and oil palm schemes were not taken into account. Felda schemes, too, have widened regional income imbalance since the majority of the schemes were located in the land-rich states of the West Coast where the poverty level was actually lower than the in East Coast states of Terengganu and Kelantan. In 1986, more than 50 per cent of Felda settlers were in land-rich Johor and Pahang whose incidences of poverty were lower than those of Terengganu and Kelantan. The Felda model could have more effectively addressed rural poverty and regional disparities had there been more consideration given to these factors. Problems associated with SOEs

The rapid development and expansion of the SOE sector had certain adverse consequences. Among others, as noted above, public expenditure rose very greatly. There was a strong correlation between the rapid expansion of the SOE sector with deficit financing, and public sector debt including foreign borrowing. This was felt most clearly during the 1980s when oil and other commodity prices fell and, with them, government revenues. After 1984, the prices of major exports such as rubber, cocoa and palm oil fell while the tin market collapsed in 1985. On the other hand, an appreciating Japanese yen became a burden on yen-denominated borrowing, the terms of trade deteriorated, and there was capital flight. During this period, rapid public sector expansion resulted in more public expenditure being financed by borrowings which rose almost four times in six years, from RM26.5 billion in 1980 to RM100.6 billion in 1986. Part of the borrowings consisted of foreign loans which rose from RM4.9 billion in 1980 to RM28.5 billion in 1987. By 1987, the accumulated losses and costs of purchase of public enterprises accounted for more than a third of the public sector’s outstanding debt and over 30% of total debt servicing (Gomez and Jomo 1997: 78-79). Worse, there was mismanagement and weak financial discipline in many SOEs, the most serious instance being the RM2.5 billion investment loss of Bumiputra Malaysia Finance (BMF), a subsidiary of the state-owned Bank Bumiputra.

265

Overall, Malaysia has managed public finance prudently, keeping external debt relatively low and maintaining a good loan repayment record. Total debt for 2001-2005 was RM228,670 million, of which 13.1 per cent was foreign debt and 86.9 per cent domestic debt. For 2006-2010, while total debt increased to RM351,318 million, the proportion of foreign debt went down to 8.9 per cent (Malaysia 2006: 58). The government adopted deficit budgeting to finance its development programmes but kept the level of deficit manageable. From 2000 to 2005, the deficit declined from 5.7 per cent to 3.8 per cent. Eighth Malaysia Plan and the Ninth Malaysia Plan, the deficit was targeted to decline from 4.8 per cent to 3.4 per cent (Malaysia 2006: 58, Table 2-7). IV. Policy changes and reforms in the 1980s and 1990s

The state’s role in development has a number of significant features. On the one

hand, the stewardship of the developmentalist state, with the contribution of the private sector, generated growth and distribution. It has had an impressive record of expanding GDP by forty times from RM12,308 million in 1970 to RM494,544 million in 2005, and raising per capita GNP by 17 times, from RM1,054 in 1970 to RM17,687. The poverty rate was reduced from 52.0 per cent in 1970 to about 5.0 per cent today, and targeted to decline to 2.8 per cent by 2010.

Especially in the 1980s and 1990s, however, the developmentalist state’s role

produced unintended consequences in the form of mismanagement, the ballooning of public sector expenditure, cronyism, corruption and inefficiency. On the political front, under Mahathir’s 22-year rule (1981 to 2003), there was at best illiberal democracy, and at worst, autocratic strongman rule marked by the suppression of dissent.

One may well ask: Could the state create the necessary conditions for growth and distribution had there been no changes and reform, however limited they may be? This chapter argues that because it is strong, resource-rich and has a well-developed administrative apparatus, the state has had the resilience and capacity to adjust to crises by adopting new measures and policy reforms to restore economic growth. Committed to the NEP, the state did not reverse or discard its objectives even under conditions of recession. Rather, the state reviewed or reformed aspects of the NEP thought to be impediments to growth. This section addresses certain policy changes and reforms that have taken place since the 1980s, and explains how these changes contributed towards growth and competitiveness, while continuing poverty eradication. Two examples are considered here: the reform of industrialization policy after the 1980s’ recession, and policy changes after the 1997/98 crisis that, among other things, sought to cushion the impact of the crisis on the poor and vulnerable groups. Finally, some consideration will be made of contemporary reforms to address the dark side of the developmentalist state. Policy changes in the 1980s

Up to the late 1990s, the industrialization policy can be divided according to

four distinct phases (Ishak 1995) – import substitution (ISI, 1958-1968), selective export-led industrialization (EOI, 1968-1981), heavy industrialization (HI, 1981-1986), and liberalized export-led industrialization (after 1986). Today, while state intervention through the GLCs and maintaining the NEP requirements persist, there is partial liberalization and export-led industrialization. But the export market, highly dependent on the USA since the 1970s, has been somewhat diversified.

266

The 1970s and 1980s were decades of growth and distribution in the urban industrial sector and the rural agricultural sector. Experience from those periods showed how, given sufficient state capacity to formulate appropriate policies, create institutions, and implementing those policies into effect backed by resource capacity, the state, with the private sector, achieved important results for growth, employment and poverty reduction.

The ISI phase started with the Pioneer Industries Ordinance 1958, which

provided tax relief to firms in pioneer industries for two to five years depending on the size of the investment (Ishak 1995: 13). Yet, because the tax exemptions were related to capital expenditure, most pioneer industries were capital-, not labour-intensive. Thus, while the economy grew 6 per cent per annum, the unemployment rate rose to 8 per cent by 1970, with the young being the worst hit. Faced with this situation, the government reoriented its industrial policy to selective EOI which was more labour intensive. This came with the the Investment Incentives Act 1968 and the Free Trade Zone Act 1971 and further Malaysia with the world economy. There was a positive effect on the economy (Ishak (1995: 22): between 1970 and 1982, manufacturing employment growth rate was double that of the whole economy, helping to reduce unemployment from 8 per cent in 1970 to 6.7 per cent in 1975, 5.6 per cent in 1980, and 4.7 per cent in 1982. Not only were more people employed in this period, more were employed full time.

In the 1980s, in line with the NEP’s objectives of restructuring to create a

Bumiputera commercial and industrial community (BCIC), Mahathir attempted a higher level of industrialization, HI. Taking Japan as the model, Mahathir changed national orientation, adopting a ‘Look East Policy’, introducing the concept of ‘Malaysia Incorporated’, and envisaging the emergence of a new class of Bumiputera entrepreneurs. Thus the Heavy Industries Corporation of Malaysia (HICOM) was set to develop the automobile industry through Perusahaan Otomobil Nasional (Proton) and the steel industry through Perwaja. Private sector involvement in the economy and private investment were given greater attention, privatization or partial privatization of various public enterprises and sectors was encouraged, and joint ventures between private and public interests were being promoted.

But, the 1980s was a tough period for Malaysia and HI (see Chapter 2). Global

recession, commodity price collapse, yen appreciation, external debts and weakening balance of payments placed tremendous pressures on the government. Its response was to enact policy reform to attract foreign investment and stimulate growth again. This was done by ‘holding the NEP in abeyance’ and passing the Investments Promotion Act in 1986, which provided generous tax holidays and pioneer status to encourage foreign investment to revive the economy. In response, foreign capital poured in, especially from Japan and other East Asian countries. The Industrial Coordination Act (ICA) was amended in 1987, relaxing some stringent NEP rules regarding the licensing of domestic manufacturing enterprises. In all, the policy reform, with the improved external market conditions, led to a rebound of exports (Gomez and Jomo 1997: 79). From then to 1988, the economy grew at 8 per cent annually largely on the basis of the very strong growth of the manufacturing sector over 1986-1990 – 13.4 per cent in 1987, 17.6 per cent in 1988, 14.2 per cent in 1989, and 15.7 per cent in 1990 (Ishak (1995: 14).

267

Economic growth and prosperity enabled distribution to be resumed. Household poverty fell from 20.5 per cent in 1985 to 6.0% in 2000 with the improvements most marked in Peninsular Malaysia and in urban areas (Malaysia 1996: 72). The 1997-98 crisis and the state’s response

Another important example of state capacity and policy change, especially the ability to change policies to cushion the impact of a severe crisis, was how Malaysia responded to the 1997-98 financial crisis. In the depths of the crisis, the government took a two-fold strategic move, setting up institutions, and adopting policy measures. First, it set up the National Economic Action Council (NEAC) on 7 January 1998 as a consultative body to the Cabinet, specifically to recommend ways to restore the economy and prevent it from going into recession. Second, the government decided not to follow the IMF’s ‘one size fits all’ structural adjustment prescriptions of raising interest rates and removing subsidies that would affect the poor and the low income groups. Instead, the government imposed selective capital controls and pegged the Malaysian ringgit to the US dollar (see Chapter 2). These policy measures were contained in the National Economic Recovery Plan proposed by the NEAC on 21 July 1998. As the crisis hit the banking sector very badly, the government established two important entities to ensure the banking system could continue to play an effective role in stimulating growth and development. These were an asset management company called Pengurusan Danaharta Nasional Berhad (Danaharta), and a special purpose vehicle known as Danamodal Nasional Berhad (Danamodal). Danaharta was given an initial funding of RM2.5 billion to purchase, manage and dispose non-performing loans of banking institutions. Danamodal was instructed to lead the recapitalization of the banking system, and to consolidate and rationalize the banking system and to accelerate the formation of a core of strong domestic banks to spearhead the development of the banking system (Malaysia 1998: 35-41).

Although the capital controls and crisis management measures were widely

criticized, these measures managed to restore stability to the financial system and the real economy. From negative growth (-7.5 per cent in 1998, based on 1987 constant prices) the economy registered positive growth of 5.4 per cent in 1999.186

Of course, there were fortuitous elements which helped. The crisis in Malaysia was not as deep as in Thailand or Indonesia. Thus, decisive policy action had a much better and faster result than it might otherwise have been. But the Malaysian government’s prudent approach towards foreign borrowings meant that it did not depend on foreign loans for internal development even when it encouraged foreign direct investment. As such, the Malaysian public sector debt was not as serious as that of South Korea, Thailand or Indonesia. Total foreign borrowing by the state and private sector institutions in Malaysia was also lower than in Indonesia and Thailand. In June 1997 Malaysia’s total foreign borrowings amounted to US$28.8 billion. Of this, government loans made up US$1.9 billion or 6.6 per cent, compared to 11.1 per cent (US$6.5 billion) in Indonesia and 17.3 per cent (US$12.0 billion) in Thailand. Malaysia’s biggest borrowers were private non-bank companies (holding 57.3 per cent of total loans) and commercial banks (36.5 per cent). However, the crisis affected the 186 The worst hit sector was construction which registered a negative growth of –23.0%, followed by manufacturing (–13.7%), finance, insurance, real estate and business services (–4.3%) and wholesale and retail trade, hotels and restaurants (–3.1%) (Jomo 2001: 19).

268

government another way. While the commercial banks’ debt was proportionately lower than the non-bank companies’, their net foreign liabilities increased by almost 150 per cent in 18 months, from RM10.3 billion at the end of 1995 to RM25.2 billion in June 1997 (Chin and Jomo 2001: 112-113). As a result, some of these banks had to be bailed out by the government using public funds. V. Reforms in the post-Mahathir era

While the government was prepared to undertake policy changes and reforms it had to address a number of problems, namely bureaucratic inefficiency, cronyism, and corruption that were evident during the Mahathir era. These problems affected global competitiveness and the ability to ‘deliver the goods’, including fighting poverty and improving livelihoods. Here the ‘paradox’ of the repressive-responsive state was crucial. The state was repressive when maintaining its power over society by wielding repressive laws and acts. Yet the state was sufficiently responsive to citizens’ demands to undertake popular reforms. The ‘responsive’ side of the state was evident when Abdullah Ahmad Badawi succeeded as Prime Minister in November 2003 (although ‘repressive’ side has by no means been removed). Abdullah promised reform, restoring integrity, installing good governance, redirecting development efforts towards agriculture, and proceeding industrialization. Hence, reforms on three key fronts – the civil service, the fight against corruption, and the judiciary – were critical during the post-Mahathir era. Reforming the Civil Service

The state’s attempts to reform the civil service started before Independence, continued under the first Prime Minister, Tunku Abdul Rahman (1957–1970), and are seen to this day. In response to nationalist demands, the Tunku gradually carried out the replacement of expatriate officers in strategic administrative posts, including the planning units of the Prime Minister’s Department, the police and the armed forces. Malaysia had inherited an efficient and modern English-educated civil service with a high sense of professionalism. The civil service offered “a career with few overt political appointees and very limited lateral entry. Bureaucrats seem imbued with the norms of national decision-making and empirical observation” (Tilman 1964: 132, quoted in Jomo 2001: 73). The service was still able to recruit “the best and the brightest” throughout the 1970s although a shortfall in technical specialists was becoming apparent (Jomo 2001: 73). Over the years, more so since the 1980s, the civil service has changed, its integrity and professionalism being somewhat compromised. Various reasons account for this: political interference in certain appointments, promotions and task implementation; decline in the standard of English; the predominance of Malays and under-representation of non-Malays (leading to the perception that it is a “Malay civil service”); and corruption, abuse of power and red tape.

The civil service is the most important institution for planning and implementing policies and programmes, thereby ensuring an efficient delivery of the public goods. As a central pillar of governance, the civil service is a critical instrument in nation-building, promoting unity among different ethnic groups. Civil servants should serve with integrity, be free from corruption and fair to all citizens. Red tape, inefficiency, and corrupt practices not only mar the image of the service but derail the state’s development efforts.

269

Attempts to reform the civil service and make it more efficient were started during the early Mahathir administration, and continued with the introduction of “new public management” in the late 1990s. Among the measures undertaken were: introducing “quality management”, subjecting government procedures to ISO auditing, introducing electronic government, key performance indicators (KPIs), performance contracts and contracting out services. The government corporatized, even privatized, selected departments. The 1997-98 crisis accelerated the process of corporatisation to ease the government’s financial burden.

However, criticisms of inefficient delivery, bureaucratic hassle, lack of transparency and accountability, and the Malay domination of the civil service were unabated. Critics argued that inefficiency and red tape incurred costs and opened avenues for corruption, thus rendering the economy less globally competitive. A World Bank study in fact showed that Malaysia was behind its neighbours in competitiveness (measured by how quicky businesses could be registered and their operations started). For example, to open a factory in Malaysia, a potential investor had to negotiate 25 steps that would take at least 281 days, compared to 14 steps and 133 days in Vietnam, 11 steps and 129 days in Singapore, and 9 steps and 127 days in Thailand. To register a business in Malaysia, one had to go through nine steps requiring 30 days, but only five steps and six days in Singapore, and two steps and two days in Australia.

The Abdullah government chose to tackle this problem directly. It established a high-level joint public-private sector task force, PEMUDAH (Business Facilitation Task Force), on 7 February 2007 (see Figure 1, above) to investigate and solve those problems. PEMUDAH, a 24-member task force consisting of top government and private sector officials, is jointly chaired by the Chief Secretary to the Government, Mohd Sidek Hassan and the Federation of Malaysian Manufacturers president Yong Poh Kon and has the objective of untangling red tape and making the public delivery system more efficient. It is a public-private mechanism for collaborative problem-solving and decision-making. According to Mohd Sidek, “The task force provides a platform which enables the private sector to become part of the solution process instead of assuming the role of merely highlighting areas of concern for the government to address” (email interview with Mohd Sidek, The Star, 22 October 2007). This mechanism is new but seems to have brought some desired results, especially in terms of global competitiveness.187 According to the latest study covering 55 major developed and industrialised countries, which was conducted by the Switzerland-based Institute of Management Development, Malaysia ranked 19 in 2008 in terms of global competitiveness, an advance over being ranked 25 in 2005, 22 in 2006, and 23 in 2007.188 187 Based on PEMUDAH’s recommendations, some new measures were announced in April 2007, particularly with regard to the operations of local authorities to facilitate business. Some of the measures included shortening the duration to obtain approvals for buildings from the previous practice of three to five years, to only six months for selected projects. Also, a one-stop centre was set up to coordinate approvals while the Certificate of Fitness and Occupancy (CFO) was replaced by the Certificate of Compliance and Completion (CCC) that would be issued by a professional body of engineers and architects, and no longer by the local authority. These measures have been well received by the public especially by the business community as they believed these would expedite delivery and lessen opportunities for corruption. PEMUDAH also urged the private sector to stop using runners and consultants in its dealings with the government but instead should use online services that are already available as sometimes additional costs and delays were not caused by the government but by these third parties. 188 The top ten countries in 2008 were USA, Singapore, Hong Kong, Switzerland, Luxemburg, Denmark, Australia, Canada, Sweden and the Netherlands. The next ten were Norway, Ireland, Taiwan, Austria, Finland, Germany, China, New Zealand, Malaysia, and Israel.

270

Other elements in recent civil service reform entailed salary revision and the

raising of the mandatory retirement age. In response to persistent struggles and demands by its employees who argued that rising costs of living had eaten into their take-home pay, the government instituted wage reforms and introduced a new pension scheme. In July 2007, the government replaced the old salary scheme, used since 1994, with a new salary scheme that awarded a big pay rise to lower-grade workers so that employees in Grades C and D received the highest increments of between 35 and 40 per cent of their basic salaries, while those in the upper scale were given a 7 per cent increment. Although some commentators imputed political motives to the huge increments, the new salary scheme was very much welcome as a means to offset rising costs, spur productivity and lessen the economic grounds for accepting bribes. Then, the government raised the mandatory retirement age from 56 to 58 years, thus retaining some experienced talent. However, the new age limit is two years short of the 60-year retirement age proposed by the government employees union, and still lower than the mandatory retirement age in other ASEAN countries.

There is on-going reform to render the civil service less Malay-dominated and rather

more multiethnic. The state’s penetration of society has been pervasive and far-reaching. People, especially Malays and other Bumiputera, tend to regard the state as their ‘protector’, and become rather state-dependent, thus ‘internalising’ the state’s omnipresence. Some non-Bumiputera, especially the Chinese and Indians, may regard the state as their ‘protector’, too, but probably many more are alienated from it. Since the 1980s, the state has been more ethnicised and Islamised, not least in recruitment into the administrative civil service, the police, the military, and the educational system. While exact figures by ethnicity are not readily available, it has been estimated that about 85 per cent of the 1.2 million public sector employees today are Malays/Bumiputera; Chinese make up about 9.4 per cent and Indians 5.2 per cent. This ethnic distribution shows a huge change from the 1970s when the civil service was more representative with 62.4 per cent Malay, 20.2 per cent Chinese and 17.4 per cent Indian.

In principle, recruitment policies and promotion for the public and private sectors are based on merit and requirements. In practice, ethnicity plays a part although it is difficult to assess how far it matters. In all ministries and government agencies, Malays are overwhelmingly the heads. Recruitment in the private sector, meanwhile, represents the flip side of the same coin. While the multinational corporations ostensibly recruit the best the market can offer irrespective of ethnicity, the Chinese-based private sector often employs Chinese, sometimes stipulating mastery of the Chinese language, as a precondition of entry.

The government through the Prime Minister has responded to this recruitment

anomaly in the civil service. Proclaiming he was ‘Prime Minister for all’ and “the time for championing parochial interest is over”,189 Abdullah has declared his intention to ensure that UMNO should fight for all Malaysians. The shift in rhetoric and discourse is quite noticeable but a shift in substance is yet to be felt. Of late, the government has called for more non-Malays to join the civil service, including the uniformed service, and appealed to the private sector to withdraw the Chinese-language requirement. The 189 Abdullah made this statement in his presidential address at the UMNO General Assembly, 7 November 2007. He went on to say that, “Issues must be addressed on the basis of the interests of the nation and the Malaysian people as a whole.” (‘A Future for Every Malaysian’, New Straits Times, 9 November 2007).

271

recent pledge by the Chief Secretary to the Government that the civil service would be “colour blind”, “gender blind” and improve ethnic diversity in recruitment and promotion has received strong support (Mazwin Nik Anis 2008, The Star; 17 January 2008). But as the New Straits Times editorial (19 January 2008) noted, “changing the composition does not merely lie in good intentions, and with the top bureaucracy alone. All levels must embrace the spirit and principle, and the process will take time to take root.”

With the civil service perceived to be a ‘homogenous institution’ that is not a

level playing field to all, recruiting candidates from a wide range of backgrounds has been difficult. In fact, there were only 9,000 Chinese applicants for civil service jobs in 2007, only 1.7 per cent of total applicants. Changing the composition and image of the civil service to a multiethnic one will take time but it is necessary reform. Fighting corruption

Malaysia’s economic growth and prosperity have been accompanied by the spread of corruption and wastage. The Transparency International Corruption Perception Index (CPI) ranked Malaysia 23 out of 45 countries with 5.28 points out of ten (ten being the least corrupt) in 1995 when the ranking first started; its position has remained in the middle with about five points till now. For example, Malaysia was ranked 36 out of 90 countries with 4.80 points in 2000, and 44 out of 163 countries with 5.00 points in 2006. Notwithstanding the weaknesses of the survey, corruption has become ‘a fact of life’ that has tainted the civil service, affected livelihoods, and influenced investors’ evaluation of the country. At the same time, money politics, or corruption in ruling political parties, practised by leaders to gain leverage or positions of power, has been a big issue.

Civil society groups and opposition parties have demanded tougher measures to curb high-level corruption in government, political parties or the private sector. The criticisms of corruption, cronyism and opaque practices, especially in government procurement, peaked during the falling out between Mahathir and his deputy, Anwar Ibrahim in 1998, during what was called the Reformasi era. Anwar was sacked from government, expelled from UMNO, and imprisoned for six years. Only after Mahathir’s retirement did Abdullah take over the reform agenda, more or less taking the wind out of the sail of Reformasi then.

Anti-corruption appears to be part of the government’s present reform agenda but, in fact, there is a long history to it. The institutionalisation of anti-corruption measures began before Independence when the colonial government passed the Anti-Corruption Ordinance 1950, followed by publishing the Commission’s Report, Integrity of the Public Services, in 1955. This led to the setting up of a special crime unit in the police force after Independence, a unit that was upgraded to be the Anti-Corruption Agency (ACA) in 1967. Alhough the ACA was renamed the National Bureau of Investigation in 1973 to widen its powers to include cases of ‘national interest’ besides corruption, its name reverted to ACA in 1982. In response to the public outcry condemning corruption and abuse of power in the 1990s, Parliament passed the Prevention of Corruption Act 1997, a watershed in institutional reform because this Act gave wider powers to the ACA to fight corruption by spelling out clearly the ACA’s tasks and responsibilities. Under Section 8 of the Act, especially, the ACA has to accept and evaluate reports of corrupt practices; investigate actions suspected of contravening the provisions of the Act, or even suspected attempts to contravene the Act, including

272

investigating those suspected of plotting to indulge in corrupt activities.190 As corruption has become more complex and ‘cross-border’, an Anti-Money Laundering Act was passed in 2001, to empower the ACA to act against those trying to gain from their ill-gotten corrupt wealth. This was followed by the passage of the Mutual Assistance in Criminal Matters Act in 2002 to enable Malaysia to work closely with other countries to deal with cross-border crimes including corruption.

Taking over the reform agenda, Abdullah made it a central plank of his March 2004

general election manifesto and led BN to its biggest ever majority in Parliament. Then, on 23 April 2004, Abdullah launched the National Integrity Plan (NIP) and the Malaysian Institute of Integrity (MII). The NIP is a comprehensive and holistic plan to address the problem of integrity, combat corruption, red tape and abuse of power, improve corporate governance and business ethics, and promote the wellbeing of society (Malaysia 2004). The MII, on the other hand, was tasked with coordinating reform efforts towards enhancing integrity and combating corruption. The government also set up the Malaysian Anti-Corruption Academy (MACA) which became operational in December 2005. Placed under the ACA, MACA trains officers in sophisticated methods of investigation of anti-corruption cases. In 2004, the government set up the Royal Commission to study methods and measures to strengthen operations and management of the Royal Malaysia Police and combat corruption within the police force. In 2006, for the first time in Malaysian history, a chapter on good governance and development (Chapter 25) was included in the Ninth Malaysia Plan 2006–2010.

Good on promises, Abdullah’s government has been short on implementation, creating frustration and cynicism among the people with his reform agenda. Corruption still bedevils the country and the ACA, which comes under the Prime Minister’s Department, is regarded to be a ‘toothless tiger’. Calls have intensified for the ACA to be turned into an independent anti-corruption commission. The disillusionment with Abdullah’s inaction on his reform agenda was a major reason for the severe setbacks the BN in the twelfth general election of 8 March 2008. Since then, Abdullah appeared to have realized his mistake, and tried to seize back the reform initiative. On 21 April 2008, he restructured the ACA, making it a Malaysian Anti-Corruption Commission modeled after the Hong Kong Independent Anti-Corruption Commission. To ensure greater checks-and-balances, an advisory panel will be set up to review the work of the Malaysia Anti-Corruption Commission, while the Commission’s report will be tabled to the Parliamentary Anti-Corruption Select Committee. The Anti-Corruption Commission will also be strengthened by adding 5,000 personnel to its existing staff of 1,300 (New Straits Times, 22 April 2008).

Judicial reform

Judicial reform, long overdue, is a very critical component of current reforms.

The judiciary was long respected for its integrity and independence. But, after the 1988 judicial crisis, when the Lord President, Tun Salleh Abas, and two Supreme Court judges were dismissed, the judiciary was regarded as being controlled by the executive,

190 The ACA is empowered to review practices, systems and procedures of government agencies to help it uncover corrupt practices and to recommend new practices, systems, and procedures. The agency may also advise heads of departments to undertake measures to minimize the risk of corruption, intensify outreach programmes for public education, and mobilize public support for the anti-corruption campaign.

273

specifically the Prime Minister. This episode, the blackest hour in the history of the judiciary, exposed the institution to unethical practices of case fixing, corruption and abuse of power. For many years, allegations of corruption were made against the judiciary. Judicial appointments and promotions, especially to the top posts, were suspected of not having been based on merit. The Bar Council, sections of civil society and leading public intellectuals have demanded judicial reform, or a ‘judicial renaissance’ in the words of Raja Nazrin, the Crown Prince of Perak, whose father, Sultan Azlan Shah, was once Lord President. However, for a long while, the executive and the judiciary remained in a condition of denial over the issue. Nothing substantive was done until certain exposures – now called ‘Lingam-gate’ – came to light in late 2007.

At the core of Lingam-gate was a video-clip showing V.K. Lingam, a senior

lawyer connected to the powers-that-be, brokering top judicial appointments during a telephone conversation in December 2001 with a senior judge. As a former president of the Bar Council noted, the content of the video clip was “chilling and outrageous.... [raising the central question] whether justice [was] for sale in Malaysia” (Yeo Yang Poh 2007: 6-7). Stressing that “the selection and promotion of judges should not be the subject of brokerage or patronage, least of which conducted by persons with business or political interests or, worse, by litigants and likely litigants,” Yeo maintained that “the video clip exposes exactly the chilling possibility that this might well have happened!”

The government initially established a three-member independent panel of

inquiry, but later agreed to set up a Royal Commission of Inquiry. The Commission’s report, released in May 2008, confirmed suspicions of interference in important judicial appointments and the misconduct of two former top judges, and recommended further investigations of them and four other personalities, including Mahathir, for breach of law. In the wake of public outcry over judicial lack of integrity and demands to restore public trust in the independence, impartiality and integrity of the judiciary, Abdullah took a bold move in April 2008 to exorcise the ‘ghost of the 1988 judicial crisis’ by redeeming the top judge and five other Supreme Court judges (who were suspended), referring to them as “heroes of judicial independence” and providing them with ex-gratia payments. The government also agreed to set up an independent Judicial Appointments Commission that had been proposed by the Bar Council since the 1990s.

Despite the problems plaguing the judiciary, many members of the bench had

acted with independence and integrity during Mahathir’s era, more so after October 2003. Thus, the court ordered Anwar Ibrahim’s release in 2004. In a more recent case, the High Court judge, Mohd Hishamudin Mohd Yunus, made a historic ruling on 18 October 2007 in favour of Abdul Malek Hussin, a former political prisoner detained under the Internal Security Act, who had sued the government over the illegality of his detention. Malek was awarded RM2.5 million in damages. It is possible the Judicial Appointments Commission and ‘exorcising of the 1988 ghost’ will permit the judiciary to regain its independence, integrity, and once impeccable reputation.

VI. Conclusion

This chapter has shown that the Malaysian state has successfully instituted development policies and programmes, including poverty eradication, due to its strong state capacity with powerful central planning agencies manned by well trained personnel, aided by fortuitous conditions. The state has a clear administrative structure, a clear structure of

274

planning authority, stemming from the national planning council to guide and approve key policy directions and thrusts. It is assisted by the national planning committee and an efficient secretariat to map out plans, policies and strategies. It is equally important that the state is well endowed with resources and expertise, and critically supported by an efficient revenue-generating and collecting system to fund development. Beyond those conditions, the Malaysian experience demonstrates that pragmatism is necessary to deal with changing conditions, in particular the volatilities of the international market. The government, though guided by broad policy objectives, was prepared to undertake reform and change course by adopting measures to deal with crises in the mid-1980s and 1997-98. However, the experience has not all been rosy. There have been drawbacks, shortfalls and even failures alongside economic growth and prosperity. Problems of bureaucracy, inefficiency and corruption have worsened. The system of checks and balances has been weakened, and executive interference has widened, particularly in the judiciary. With a much criticized public delivery system, worrying levels of corruption among civil servants, and erosion of judicial independence, public mistrust and cynicism have grown. On the TCI, Malaysia has only a ‘satisfactory’ or ‘less than satisfactory’ score leaving the country behind its neighbours in global competitiveness. All these call for concerted reforms, but these could only take place when the political system becomes more free, responsive and less repressive. The role of opposition parties and civil society groups has been critical in raising such issues and raising people’s awareness. The leadership transition from Mahathir to Abdullah provided a window of reform opportunity. Various measures taken by the government of late are promising but their results on many issues remain to be seen.

275

References Abdul Rahman Embong. 2008. “Malaysian Developmentalist State: Its Origins, Nature

and Transformation.” In Joan M. Nelson, Jacob Meerman & Abdul Rahman Embong (eds.). Globalization and National Autonomy: The Case of Malaysia. Institute of Southeast Asian Studies, Singapore & Institute of Malaysian & International Studies (IKMAS), UKM, Bangi. .

____. 2002. State-led Modernization and the New Middle Class in Malaysia.

PalgraveMacmillan, Houndmills, Basingstoke. ____. 1996. “Social Transformation, the State and the Middle Classes in Post-

Independence Malaysia”. Southeast Asian Studies 34 (3) December: 56-79. Brown, D. 1994. The State and Ethnic Politics in Southeast Asia. Oxford University

Press, London & New York. Chin Kok Fay and Jomo K.S. 2001. Financial Liberalisation and System Vulnerability.

In Jomo K.S. (ed.), Malaysian Eclipse: Economic Crisis and Recovery. Zed Books, London.

Chandra Muzaffar. 1979. Protector? An Analysis of the Concept and Practuce of

Loyalty in Leader-led Relationships within Malay Society. Aliran, Pulau Pinang. Crouch, H. 1996. Government and Society in Malaysia. Allen & Unwin, St Leonards,

NSW. Faaland, J., J. Parkinson & Rais Saniman. 2003. Growth and Ethnic Inequality:

Malaysia’s New Economic Policy. Utusan Publications and Distributors , Kuala Lumpur.

Held, D. et al. (eds.) 1983. States and Society. Basil Blackwell, Oxford. Ho Khai Leong. 1988. Indigenizing the State: The New Economic Policy and the

Bumiputera State in Peninsular Malaysia. PhD dissertation submitted to the Graduate School of the Ohio State University, USA.

Hua Wu Yin. 1983. Class and Communalism in Malaysia: Politics in a Dependent

Capitalist State. Zed Books, London. Ishak Shari. 1995. “Industrialization and Poverty: The Malaysian Experience”. Jurnal

Antropologi dan Sosiologi. Universiti Kebangsaan Malaysia. Vol. 22: 11-29. ____. 1999. Bumi Semua Manusia. Penerbit Universiti Kebangsaan Malaysia, Bangi. ____. 2002. The Earth for All Humanity: Managing Economic Inequality in the Era of

Globalisation. Penerbit Universiti Kebangsaan Malaysia, Bangi. Ishak Shari & Abdul Rahman Embong. 1998. Rapid Participatory Assessment of the

Social Impact of the Financial and Economic Crisis in Malaysia. Final Report prepared for the United Nations Development Programme (UNDP), Asia-Pacific Office, Kuala Lumpur.

276

Ismail Md Salleh. 2004. “Rural Development and Improving Inequality”. In Abdul

Rahman Embong (ed.), Globalisation, Culture and Inequalities: In Honour of the Late Ishak Shari. Penerbit Universiti Kebangsaan Malaysia, Bangi.

Jesudason, J. V. 1989. Ethnicity and the Economy: The State, Chinese Business, and

Multinationals in Malaysia. Oxford University Press, Singapore. Jomo K.S. 1986. A Question of Class: Capital, the State, and Uneven Development in

Malaya. Oxford University Press, Singapore. Loh, Francis K.W. 2002. “Developmentalism and the Limits of Democratic Discourse”.

In Francis K.W. Loh and Khoo Boo Teik (eds.), Democracy in Malaysia: Discourses and Practices. Curzon Press, Richmond, Surrey.

Low, Linda. 2000. “The Politics of Asian Corporate and Financial Restructuring”. In

Abdul Rahman Embong & Jürgen Rudolph (eds.), Southeast Asia into the Twenty First Century: Crisis and Beyond. Penerbit Universiti Kebangsaan Malaysia, Bangi.

Lubeck, P. M. 1992. “Malaysian Industrialization, Ethnic Divisions and the NIC Model:

The Limits of Replication”. In R.P. Appelbaum & J, Henderson (eds.), States and Development in the Asian Pacific Rim. Sage Publications, Newbury Park.

Malaysia. 1971. Second Malaysia Plan, 1971-1975. Economic Planning Unit, Prime

Minister’s Department, Kuala Lumpur. ____. 1976, Third Malaysia Plan, 1976-80. Economic Planning Unit, Prime Minister’s

Department, Kuala Lumpur. ____. 1981. Fourth Malaysia Plan, 1981-85. Economic Planning Unit, Prime

Minister’s Department, Kuala Lumpur. ____. 1986. Fifth Malaysia Plan, 1986-90. Economic Planning Unit, Prime Minister’s

Department, Kuala Lumpur. ____. 1991. Sixth Malaysia Plan, 1991-95. Economic Planning Unit, Prime Minister’s

Department, Kuala Lumpur: ____. 1996. Seventh Malaysia Plan, 1996-2000. Economic Planning Unit, Prime

Minister’s Department, Kuala Lumpur. ____. 1998. Economic Report 1998/99. Ministry of Finance, Kuala Lumpur. ____. 2001. Eighth Malaysia Plan, 2001-2005. Economic Planning Unit, Prime

Minister’s Department, Putrajaya. ____. 2004. National Integrity Plan. Malaysian Institute of Integrity, Kuala Lumpur. ____. 2006. Ninth Malaysia Plan 2006-2010. The Economic Planning Unit, Prime

Minister’s Department, Putrajaya.

277

____. 2007. Laporan Ketua Audit Negara Mengenai Penyata Akaun Awam dan Pengurusan Kewangan Kementerian/Jabatan Kerajaan Persekutuan Tahun 2006. (Auditor-General’s Report for 2006). Jabatan Audit Negara, Putrajaya

Mazwin Nik Anis. 2008. “Attracting the Best”, The Star, 17 January 2008. Ozay Mehmet. 1986. Development in Malaysia: Poverty, Wealth and Trusteeship.

Croom Helm, London. Puthucheary, M. and Norani Othman (eds.). 2005. Elections and Democracy in

Malaysia. Penerbit Universiti Kebangsaan Malaysia, Bangi. Ragayah Haji Mat Zin. 2004. “Income Distribution and Povety Eradication in Malaysia:

Where Do We Go From Here?” In Abdul Rahman Embong (ed.), Globalisation, Culture and Inequalities: In Honour of the Late Ishak Shari. Penerbit Universiti Kebangsaan Malaysia, Bangi.

Rugayah Mohamed.1995. “Public Enterprises”. In Jomo K.S. (ed.), Privatising

Malaysia: Rents, Rhetoric, Realities. Westview Press, Boulder. Saravanamuttu, J. & Francis K.W. Loh. 2004. “Development and Democracy in

Southeast Asia”. In Abdul Raman Embong (ed.), Globalisation, Culture and Inequalities: In Honour of the Late Ishak Shari. Penerbit Universiti Kebangsaan Malaysia, Bangi.

Sity Daud. 2003. Negara Pembangunan Malaysia: Daripada Dasar Ekonomi Baru

kepada Dasar Pembangunan Nasional (Malaysian Developmentalist State: From the New Economic Policy to the National Development Policy). Unpublished PhD thesis submitted to Universiti Kebangsaan Malaysia, Bangi, Malaysia.

Sulochana Nair, 2007. “Fostering National Unity and Enhancing Ethnic Relations in

Malaysia: The Role of Poverty Eradication Policies”. In Abdul Rahman Embong (ed.) 2007. Rethinking Ethnicity and Nation-building: Malaysia, Sri Lanka and Fiji in Comparative Perspective. Persatuan Sains Sosial Malaysia (Malaysian Social Science Association), Kajang, pp. 114-151.

Yeo Yang Poh. 2007. “Politics of Disappearance: No Justice for Sale! No More

Vanishing Tricks!”. Aliran Monthly. Vol. 27(7): 5-7.