Malaysian Maverick: Mahathir Mohamad in Turbulent Times Page 15

  Proton's day of reckoning neared as Malaysia met its obligations under an ASEAN Free Trade Area pact, which required tariffs on all manufactured goods in the most developed member countries to be reduced to no more than 5 per cent by 2002. Kuala Lumpur obtained an exemption for cars and components: 20 per cent by 2005 on the way to the 5 per cent cap by 2008. As Proton gradually became exposed, its share of Malaysia's 430,000 a year passenger-car market tumbled from 60 per cent in 2002 to 41 per cent in 2005 — and the company slipped back into the red. The entire Malaysian motor industry, employing a total workforce of more than 100,000, was vulnerable, including Proton's two factories built at a cost of RM2 billion and producing a range of cars from 1300 c.c. to 2000 c.c.; another Malaysia-Japan joint venture, which began producing a second "national car" in 1994, the tiny 660 c.c. Kancil (mousedeer) based on Daihatsu Motor Company's Mira model; a third "national car", a Citroen with 1100 c.c. to 1500 c.c. versions, assembled by Malaysian interests with technology and equipment supplied by France's Automobiles Citroen SA; and dozens of uncompetitive local autoparts makers and vendors. The biggest threat emanated from Thailand, which had pursued the opposite strategy to Malaysia in the 1990s. Thailand turned itself into the "Detroit of the East" by eschewing a national car and instead luring major auto makers by offering itself as a global production base.

  One possible way to save Proton was for it to forge an alliance with a major foreign automaker. But the Malaysian government, which retained control of the company through state investment vehicle Khazanah Nasional Bhd., was reluctant to sell a major stake or allow management control to pass into the hands of foreigners. Yet that seemed to be the only way to attract a suitable partner, which naturally would want to protect its technology and completely upgrade Proton. The company's future became one of the first serious points of contention between Dr. Mahathir and his successor, Abdullah Badawi.

  To revive Malaysia's flagging economy, which had been punctured by global recession and further burdened by the government's heavy industry commitments, the Mahathir administration in the early 1980s drastically altered the country's development strategy. It reduced the government's role in the economy and gave a bigger stake once again to private business. To switch from state-spurred to private sector-led growth, Malaysia encouraged foreign investment and adopted a policy of privatization, which Dr. Mahathir unveiled in 1983. Privatization was novel, as the worldwide wave that was to become identified with British Prime Minister Margaret Thatcher and U.S. President Ronald Reagan was just getting started. It was also radical, since it promised to reverse the method chosen by Dr. Mahathir's predecessors in pursuing the NEP: creating public enterprises to redistribute wealth and generate jobs.

  Trying to spend its way out of recession, Malaysia had sunk into economic malaise. Its expansionary fiscal policies, funded by heavy borrowing at home and abroad, led to serious budget deficits and rapidly rising debt-service charges. Between 1970 and 1982, government consumption and investment as a share of GDP had jumped almost 50 per cent as the bureaucracy quadrupled. Counting investments in Petronas, the public sector share of GDP was about 38 per cent in 1982, one of the highest levels in the non-communist world.[53] After three straight years of large budget deficits — the shortfall reached a staggering 19 per cent of GDP in 1982, financed by foreign borrowing that tripled in three years — the government concluded that, as one senior finance official put it, "We bit off more than we can chew."[54]

  As Dr. Mahathir's finance minister at the time, "I did try to contain his obsession with big spending," said Tengku Razaleigh Hamzah. Projects spearheaded by the prime minister that contributed to Malaysia's soaring debt — Perwaja steel, Proton, the Dayabumi building and a bridge from the mainland to Penang island — "were to be completed in a short time and were not provided for in the country's Five-Year Plan", he said.[55]

  Having cut public spending and borrowing as part of an austerity regime, Dr. Mahathir framed privatization largely in terms of the financial squeeze: Since the government could not foot the bill for the infrastructure the country needed, the task was being assigned to the private sector. Yet he almost certainly would have turned to privatization anyway. As he recorded in The Malay Dilemma, Dr. Mahathir believed strongly in the ability of profit-motivated private companies to deliver the goods. In the 1960s, he had persuaded the Alor Star Town Council to partially privatize night-soil collection to overcome the problem of recalcitrant workers, who showed their displeasure with houses and shops that did not give them a tip by spilling and scattering waste.[56]

  Privatization was a crucial element in Dr. Mahathir's vision to mould Malaysia into a nation of innovative entrepreneurs and skilled, disciplined workers. He would sponsor the nascent Malay business class, which in time could take its place alongside successful, non-Malays and be internationally competitive. Privatized ventures had to meet the NEP target of at least 30 per cent bumiputra equity and employment participation. The close connection between privatization and affirmative action goals made Malaysian privatization unique.[57]

  Privatization Malaysian-style was as much a political as an economic exercise. Characterized by Lim Kit Siang, the opposition leader, as "piratization", it usually operated on a first-come, first-served basis, without any open bidding. A company that submitted a proposal ahead of rivals got the contract, as long as it had the right connections: an inside track to the UMNO leadership. The winners were almost all well-connected and influential businessmen, or relatives of politicians.

  In 1984, a year after it was introduced, privatization received a huge boost when Dr. Mahathir recruited Daim Zainuddin directly from the private sector to replace Tengku Razaleigh as finance minister and UMNO treasurer. Under Daim, the scope of privatization broadened and the pace quickened, especially as Malaysia's economic recession deepened into crisis in 1985-86. While Dr. Mahathir defined privatization as simply the opposite of nationalization and thought in terms of "just a few" projects, Daim "identified so many it went beyond my expectation," the prime minister said.[58] Privatization covered everything from the complete or partial sale of state concerns, the lease of government property, joint ventures such as Proton, management buy-outs, private financing of construction projects, contracting out public services, and allowing outside competition in fields previously restricted to the state.

  Nearly 500 enterprises and services were injected with private capital or management over the next 22 years.[59] They included ports, utilities and highways, and some of the generally poorly performing state-owned enterprises formed mostly in the 15 years since the introduction of the NEP. Select government departments were corporatized and listed on the stock exchange, such as Tenaga Nasional Bhd., the power company, and Telekom Malaysia Bhd., the telecommunications utility. Both remained majority state-owned, and the government held a "golden share" that allowed it to veto company decisions deemed to be against the national interest. As state governments and municipal authorities joined the trend, dockyards, hotels, garbage disposal, water supply and city bus operations were privatized.

  The main beneficiaries of privatization, though denounced as cronies by critics, were fledgling entrepreneurs as far as the government was concerned. They bought official assets at discounted prices, obtained soft credit and enjoyed state-backed guarantees for loans. Dr. Mahathir was happy to defend the creation of corporate empires built through personal contacts with the UMNO elite. He argued that they were more capable of using state patronage resources than the broad mass of bumiputras. They also performed "national service" by undertaking less profitable projects in the country's interest, he said.

  While some high-profile non-Malay tycoons benefited from privatization, most lucrative contracts were directed at Malay businessmen associated with one of Malaysia's three top political leaders: Dr. Mahathir, Daim and Anwar Ibrahim, the deputy prime minister who took over from Daim as finance minister in 1991. Each of the politicians seemed to have different aims: Dr. Mahathir thought he had the ab
ility to pick future winners for his globally competitive bumiputra class; Daim used business protégés as proxies for his own commercial interests, with most of them sitting on the boards of his family companies; Anwar, by contrast, created a group of business associates to develop a political base in UMNO.[60]

  The most successful were "Daim's boys", the best and brightest of the young executives he had nurtured at Peremba Bhd., a state-owned commercial property corporation, before joining the government. They became high profile multi-millionaires and enjoyed celebrity status in the late 1980s and 1990s, the best known being Halim Saad of the Renong Group, Tajudin Ramli of Technology Resources Bhd. and Wan Azmi Wan Hamzah of Land and General Bhd. They were the new role models for the Malays, "a position previously filled by political figures, especially those who had fought for the country's independence".[61]

  The government declared privatization a resounding success. It said it gained about RM23 billion from the sale of equity and nearly RM13 billion from the sale of assets, and pointed to savings of at least RM122 billion for not having to build infrastructure. New revenue was amassed from lease payments and corporate taxes, and substantial debt was transferred to the private sector. Privatization was also credited with improving efficiency and service, and with trimming the bureaucracy by more than 114,000 employees.[62]

  While there was no doubt that privatized entities considerably deepened and broadened Malaysia's stock market and made it the biggest in Southeast Asia, privatization itself remained extremely contentious. That it concentrated wealth and opportunity in a privileged handful of Malays at the expense of the vast majority was a sore point. Public monopolies sometimes became private monopolies with a noticeable deterioration in performance. A hidden cost to taxpayers, potentially devastating, was what economists call contingent liabilities: The government sometimes guaranteed a certain rate of return to recipients, stretching over decades, so that profits but not risks were privatized; details were not disclosed to the public and not reflected in the national budget. By 2004, the Malaysian government's total contingent liability stood at roughly RM80 billion.[63]

  Much of the debate about privatization ceased after the Asian financial crisis engulfed Malaysia in 1997-98 and devastated the celebrated bumiputra companies. They were too indebted and lacked managerial competence. The government either bailed them out or effectively re-nationalized them, converting private debt into public burden, with no one held responsible for the losses.[64] In five years, the government spent RMll billion rescuing seven privatized enterprises, including RM7.73 billion for two light rail systems in the capital.[65]

  Although the NEP officially expired in 1990 as originally envisaged, it continued as Malaysia's defining development framework in other guises — the National Development Policy until 2000 and the National Vision Policy until 2010. Colloquially, it was still called the NEP. The twin objectives — the eradication of poverty irrespective of race and the restructuring of society to end the identification of race with economic function — were to be pursued in the name of national unity, however long it took.

  Dr. Mahathir's proposal for Malaysia to be fully developed within 30 years, outlined in a speech in early 1991, was promoted as Vision 2020. Although most of the elements were familiar, drawn from existing plans and programmes, the package caught the public imagination and was the subject of numerous studies, seminars and conferences. It would require the country to grow at 7 per cent annually on average, from 1990 to 2020, doubling GDP every ten years. GDP would be eight times larger in 2020 than in 1990, and Malaysians would be four times richer in real terms.

  Dr. Mahathir's idea of a fully developed nation went beyond the material. He outlined nine "central strategic challenges" that must be met to achieve all-round and well-balanced development — politically, socially, spiritually, psychologically and culturally, as well as economically. His single reference to the goal of "one Bangsa Malaysia", usually translated as "Malaysian race" or "Malaysian people", raised the hope for an end eventually to race-based politics. Although Dr. Mahathir probably meant nothing more than a united Malaysian nation bound together by prosperity, non-Malays, especially, saw him as the leader most likely to narrow ethnic divisions.

  Although privatization generated lots of buzz around the Malaysian stock market, it was the more dynamic foreign-dominated, export-oriented manufacturing sector that would ease Malaysia out of its prolonged slump and power it to glory. With unemployment at a record high and the economy contracting by 1.1 per cent in 1985 and growing by a feeble 1.2 per cent in 1986, Dr. Mahathir pragmatically liberalized Malaysia's investment climate. He took practical steps to loosen the NEP guidelines for both foreign investors and wary Chinese Malaysians, who had been transferring their assets abroad rather than build factories at home. As early as 1984, Dr. Mahathir signalled a change in attitude by announcing that foreign investors in capital-intensive and resource-based export industries might be allowed to keep majority control. When the Swiss food and drink maker Nestle S.A. restructured its Malaysian operations in line with the NEP, it was able to retain a 51 per cent stake, rather than sell 70 per cent to local investors.

  A raft of other measures culminated in Dr. Mahathir's announcement that the bumiputra equity requirements would be suspended for certain new foreign investments and foreign-owned expansions made between 1 October 1986 and 31 December 1990, when the NEP was supposed to end. Such investments committed in that period would not be required to restructure their equity "at any time". Dr. Mahathir's stand took courage, since there was no more sensitive topic than the NEP. He simply told the Malays that distributing jobs was as important as distributing equity. "Obviously, if there is no growth there will be nothing to distribute," he said.

  Another near simultaneous structural adjustment a world away held profound implications for Malaysia. Worried by the strength of the dollar, the finance ministers of the five largest industrial countries, then known as the G-5, met at the Plaza Hotel in New York in 1985 and agreed on concerted action to reduce its value. As the Plaza Accord took hold, the sustained appreciation of the yen triggered a rolling change in the international division of labour. To remain competitive, Japanese companies moved up the technological ladder and relocated their older factories to countries with cheaper land and labour. As South Korea, Taiwan and Hong Kong prospered anew from the influx of Japanese investment, their own currencies appreciated and their production costs rose. They in turn relocated their manufacturing operations to China and Southeast Asia, taking the Japanese with them. Foreign investment flooded into Thailand first, then Malaysia and Indonesia, spreading the "economic miracle" southward.

  With Malaysia cutting corporate tax rates, the country quickly climbed out of the doldrums and entered an extended period of phenomenal growth. GDP expanded annually by an average of 9.3 per cent for the nine years from 1988 to 1997,[66] with manufacturing replacing agriculture as the leading segment of the economy by the late 1980s, and mining becoming more important.[67] By 1980, crude petroleum exports had taken over the historical position of rubber as the chief foreign exchange earner, and petroleum was contributing 25 per cent of government revenue by 1985.[68] Hundreds of thousands of foreign workers streamed into Malaysia, often illegally and working out of sight on plantations, as unemployment turned into a labour shortfall. Malaysia was among the world's fastest growing economies.

  Kuala Lumpur also liberalized the domestic financial sector to welcome portfolio investment, giving little thought to its being the most mobile form of capital, relentlessly profit-seeking and prone to depart as quickly as it arrived. The government sought to take advantage of this "hot money" to expand Malaysia's capital market and transform the country into a regional financial centre. Official statements hinted that Kuala Lumpur aspired to overtake Singapore or displace Hong Kong after the British colony's return to China in 1997.[69] With Malaysia one of the world's "emerging markets" then in vogue with foreign fund managers, portfolio investment deluged the Ku
ala Lumpur Stock Exchange, later renamed Bursa Malaysia. Foreign funds invested in shares and corporate securities increased by more than nine-fold from 1991 to 1996.[70]

  Big or small, other countries were impressed with Malaysia's performance. Sometimes-smug Singapore was jolted by Kuala Lumpur's investment in container ports, a "super" airport and an enlarged financial centre. "This made us re-examine our competitiveness, improve our infrastructure and work smarter to increase our productivity," said former Singapore prime minister Lee Kuan Yew.[71] Stunned by Malaysia's visible progress since a visit 16 years earlier, Indian Prime Minister V.P. Singh in 1990 asked his economic adviser to prepare a paper that would help New Delhi emulate Kuala Lumpur's "spectacular success".[72]

  The only economic problems in the mid-1990s seemed to be the stresses and strains of success. Demand for power began to outstrip supply. A growing shortage of skilled and semi-skilled workers drove up wages, eroding Malaysia's competitive edge in labour-intensive manufacturing. But the government dismissed suggestions that the economy was overheating and should be allowed to take a breather.

  Despite Vision 2020's lofty rhetoric about balanced development, "acquisitive, profiteering, short-termist behaviour proliferated" as the good times rolled. "It was a regime of accumulation and speculation...Rapid growth became entrenched as a desirable objective for its own material ends...".[73] Many Malaysians "saw nothing else but wealth".[74] With higher incomes, lifestyles changed. The wealthy adopted fetishes that "followed the footsteps of the rich and famous of the world", while members of the middle-class nouveau riche competed with one another over status symbols: blue-chip stocks, expensive houses, imported cars, golf club memberships and the latest cell phones.[75] "We are developing our unique Malaysian Dream," economist banker and former official Ramon V. Navaratnam told a reporter for a U.S.-owned newspaper, "just as you have your American Dream."[76]