MALAYSIAN RACIAL ECONOMIC PREFERENCES CRITIQUED AT

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001692

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TAGS: ECON EFIN EINV MY

SUBJECT: MALAYSIAN RACIAL ECONOMIC PREFERENCES CRITIQUED AT
CONFERENCE IN KL

REF: 2006 KUALA LUMPUR 0930;

2006 KUALA LUMPUR 1942


1. (SBU) Summary: Malaysia's race-based economic preferences were
roundly criticized at the annual National Economic Outlook
Conference hosted by the Malaysian Institute of Economic Research
(MIER). In the keynote address, the Crown Prince of the State of
Perak called for national unity and pragmatic economic policies
designed to improve the country's competitiveness, essentially a
polite rejection of race-based policies. Stronger attacks on
Malaysia's racial preferences were made by a former World Bank
economist and an Australian academic who argued that incentives in
Malaysia's economy were becoming increasingly distorted, leading to
a loss of competitiveness. While no one expects the government of
Malaysia to undertake policy change in this sensitive area in the
near term, it is notable that a government-funded think tank
provided the forum for this much needed debate. End Summary.


CROWN PRINCE OF STATE OF PERAK CALLS FOR CHANGE
-------------- --


2. (U) In his keynote address the Crown Prince of the State of
Perak called for "pragmatism and fairness," a subtle attack on the
government's current policies in terms of both its economic agenda
and its divisive racial preferences. On the economic front, he
described Malaysia as "squeezed between the low-cost economies of
China and Vietnam and the high-technology economies of Japan and
South Korea," and called for "the most competitive, innovative and
flexible responses."


3. (U) He cited the oft-repeated mantra that Malaysia needs to move
"up the technological ladder"; however, a far greater part of his
address focused on social and human capital, which he said were
essential to development. He said Malaysia must foster networks
among its different ethnic, religious, and territorial groups. He
called for "increasing opportunities for bonding and bridging in
residential neighborhoods, classrooms and the workplace, all with
the understanding that more cultural mix is better."


4. (U) Alluding to the ongoing brain drain, the Crown Prince asked,
"Can entrepreneurs, scientists, and technologists be nurtured
without an enabling political, social, economic and cultural
environment? Can they flourish in the presence of perverse
incentives and disincentives? ...There are countries today whose
citizens are highly educated and whose scientists and engineers are
at the leading edge in their fields but who want nothing more than
to leave their countries. Countries must change in line with the
aspirations of their citizens or they risk losing their best and
brightest."


MEASURING WEALTH BY RACE
--------------


5. (SBU) Lim Teck Ghee, a leading economic analyst and former World
Bank staffer, calmly explained his earlier study on distribution of
wealth among Malaysia's racial groups (reftels) which concluded that
the wealth of ethnic Malays had already exceeded the government's
targets. His conclusion effectively challenged the stated basis of
the government's racial preference policies. Lim also briefly
reviewed several other studies that had reached similar conclusions.
Two studies from the late 1980s suggested that that the lower
classes bore the highest social costs of the racial preference
policies, while a small group among the upper classes enjoyed the
benefits. Two other studies, one from 1989 and another from 2002,
concluded that the government's wealth targets for ethnic Malays had
been reached or exceeded, as did Lim's own 2006 study.


6. (U) Lim reviewed some of the findings and recommendations of his
earlier study on the impact of Malaysia's racial policies on the
economy and society. First, he pointed out that the government holds
more than a third of publicly traded corporate equity, but that
government-controlled companies reflected little entrepreneurial or
manufacturing capacity. He recommended that government-owned
entities be managed by competent professionals with expertise in the
business of the company under their charge. Senior management
positions should not be determined on the basis of race.

KUALA LUMP 00001692 002 OF 003




7. (U) Second, he pointed out that the current practice of
distributing 30 percent of initial public offerings (IPOs) to
individual ethnic Malays generally benefited only an elite few who
often divested the shares immediately for huge profits. Lim
recommended that Malay IPO allocations not go to individuals unless
a mechanism could be introduced to ensure that the beneficiaries
played a prominent role in the management of these companies. One
option would be to make such allocations to existing trust agencies
for Malays and to community-based trust agencies for Malaysian
Indians and residents of Malaysian Borneo. [Note: among these two
groups are some of Malaysia's poorest people. End note.]


8. (U) Third, Lim said GOM regulations and policies were stymieing
entrepreneurial development and hindering domestic and foreign
investment. Ethnic preferences undermined entrepreneurial endeavors
and the creation of a competitive economic environment. The GOM
could better achieve its goals through capacity building efforts
such as education and skills training rather than through forced
equity restructuring.


ECONOMIC FREEDOM: FROM 9TH TO 60TH PLACE
--------------


9. (U) More Malaysian feathers were ruffled when Wolfgang Kasper,
Emeritus Professor of Economics, University of New South Wales,
Australia, displayed graphs demonstrating a direct correlation
between economic freedom and prosperity and cited the Cato
Institute's "Economic Freedom of the World" 2007 Annual Report which
ranked Malaysia as 9th most free country in 1990 but as 60th in

2005. Kasper described Malaysia as having reached that halfway
point in its development and outlined the elements of the rest of
the journey: secure property rights, free markets, and a small,
rule-bound, non-corrupt government. He summed up his analysis of
Malaysia as follows: "The politicization of economic life leads to
stagnation and social convulsion, a prospect that only the
unrealistic and naive can face with self-satisfied complacency. It
seems to me that it would be much more naive and unrealistic to
tolerate the cancer of crony capitalism and heavy reliance on
pervasive, top-down bureaucratic controls and big government.... It
is the big political challenge of the present generation of decision
makers to abandon short-sighted, selfish rent-seeking in order to
ensure that the vision of the developed-country shore ahead can be
attained."


RESPONSES FROM THE AUDIENCE
--------------

10. (U) In response to Lim's presentation, a number of members of
the audience spoke out angrily, including a member of the
Government's Economic Planning Unit (EPU) who resorted to a personal
attack on Lim rather than on the points he raised. Another critic
in the audience, Ms. Aminah binti Pit Abdul Rahman who had been a
government employee for 23 years, became visibly agitated and
reminded the audience that ethnic Malays comprised 60 percent of the
population; therefore, she argued (or rather shouted) that the
government targets should be raised from 30 percent to 60 or 70
percent. Some respondents in the audience were upset about Kasper's
comments, with one indignantly noting that Malaysia should be
praised for progress achieved.



11. (SBU) Comment: In the run-up to national elections, due by April
2009 but expected before April 2008, there has been increased
attention paid to the GOM's economic and social policies in general
and its 37-year old race-based economic preference policies in
particular. There is widespread concern among non-Malays that these
policies are marginalizing them and therefore breaking down
Malaysia's social cohesion. Many of the country's best and
brightest non-Malay youth are migrating, perceiving little long-term
hope of being treated as anything but second-class citizens in
Malaysia. Many ethnic Malays, on the other hand, maintain a more
defensive posture, apparently convinced of the rhetoric that they
are more deserving of special protections because of their past
disadvantage. Their outbursts at the conference in response to
criticism of the status quo [except, of course, that of the Crown
Prince of Perak] were more emotional than pragmatic. Despite a

KUALA LUMP 00001692 003 OF 003


handful of such outbursts, the overwhelming majority of the audience
remained silent. At lunch a Malay who had been government employee
for many years expressed gratitude for Kasper's presentation on
economic freedom, telling econoff, "We need foreigners to say these
things." While little change can be expected in the near term, the
biggest news is that these kinds of issues can be discussed at all
in a conference hosted by a government-funded think tank. The
conference would appear to be another example where Prime Minister
Badawi's government is ready to allow more open debate as a first
step toward possible revisions in policy at a future date when it
becomes politically feasible to do so.

KEITH