Affirmative Action Hurts…

… Malaysia.

So what is holding back the Malaysian equity market?

A lot of investors believe that it is the 35-year-old affirmative action programme for ethnic Malays, the country’s largest racial group.

The policy to promote Malay interests was meant to compensate for the strong economic power wielded by the country’s ethnic Chinese minority. Malay resentment of Chinese business dominance led to race riots in 1969 and the subsequent introduction of what was called the New Economic Policy (NEP).

Malays were given preference for university places and state jobs and Malays were also required to own at least 30 per cent of any local business. Although the policy has succeeded in narrowing the ethnic divide, it has also fostered a culture of patronage that has led to economic inefficiencies.

….

A debate over the affirmative action policy has flared up in the past few weeks with the release of a report by a respected local think-tank, the Asian Strategy and Leadership Institute (Asli), which claimed that Malays owned 45 per cent of corporate equity rather than the 19 per cent claimed by the government.

The report called into question the continuation of the NEP, which has been based on the premise that it should remain in force until Malays owned at least 30 per cent of corporate equity.

….

he retention of the NEP threatens to undermine Malaysia’s economic competitiveness. One casualty could be the proposed bilateral trade agreement between Malaysia and the US because Washington is pushing for a relaxation of affirmative action requirements on public procurement.

Another warning sign was the release this week of the annual report on global investment by the United Nations Conference on Trade and Development. It revealed that foreign direct investment in Malaysia fell by 14 per cent last year to $4bn.

Its findings came as a surprise since Malaysia offers plenty of cheap land, a weak currency, an educated workforce and good infrastructure that normally would attract foreign investors.

Moreover, foreign manufacturers are exempt from NEP requirements. But the increasingly polarised political climate fostered by the NEP is not conducive to correcting some of the economic problems created by it.

No wonder many foreign equity and manufacturing investors are giving Malaysia a pass.

Those Malays and the companies now avoiding it like the plague must be so dumb they don’t realize that the new global markeplace, etc., etc., etc., requires affirmative action….