Economics History & heritage

[2910] Few lessons from post-war 1940s Malayan supply-side crisis

We are experiencing a supply-side crisis. The lockdown is inducing labor shortage, and it has the potential of exerting lasting damage on the economy if not handled properly.

It seems to me that the last time Malaysia or any of its components had a supply crisis was in the 1940s during World War II and during the immediate post-war period. Productions of various kinds were devastated, leaving many without jobs and forced into subsistence. The war not only destroyed productive capacity, but also suppressed demand.

The end of the war brought demand back up quickly. Unlike demand however, production took time to get back to speed. Wars had destroyed all the equipment, and killed off many that worked at the mines, plantations, factories and shops. Rebuilding those and reemploying the workers took time.

That meant massive unemployment in the meantime.

Massive unemployment also meant employers had great bargaining power: wage growth was weak if any. Faced with unemployment, weak wage growth and spiking prices, social discontent was prevalent. This was one of many reasons the communist movement gained sympathy among the masses: industrial sabotage became a norm which worsened efforts to restore production.

There are a few lessons to take from the economics of post-war 1940s. Disrupted supply chain in the form of business failures and labor shedding took time to recover, and could not move as fast as demand. When demand returned with supply failing to do the same, that demand went unfulfilled. This led to massive shortages and subsequently, massive inflation. Never mind the social issues and the complex 1940s political situation.

In this sense, the negative economic effects of the war lasted beyond the war.

Coming back to today, our mines, plantations, shops, offices and other facilities obviously do not suffer similar war devastation. And the social reality is different and undeniably more stable though racial tension that originated from the war continues to linger.

But our current supply-side crisis, now lengthened to 4 weeks, is heightening the risk of business failures and job loss. That means reduced potential and once the crisis is over and demand back up, that reduced potential means shortages and significantly higher inflation, and higher prolonged unemployment. Growth could be depressed for some time until the potential returns to its pre-crisis period. The negative economic effects of this supply-side crisis would last beyond the actual crisis.

This is why we need to protect the potential now. Prevent business failures. Protect jobs. This is so that once the crisis is done, we could press on the demand paddle right away without having to wait for some time to repair the supply transmission. We do not have to suffer a lasting effect of this crisis.

History & heritage Politics & government Society

[2898] Visual representation is history repeating itself

They say history repeats itself. Wikipedia in fact as a page calls historic recurrence describing the phenomenon.

I have been thinking how this is relevant to this age of hyperconnectedness with information overload that is increasingly becoming beyond the capacity of human beings to analyze and verify. We already have the too long don’t read culture that permeates everywhere. When I was working at a unit inside the Financial Times, we were told to write a piece no longer than a thousand words and ideally, 500. I found that a constant challenge, with all the nuances that needed to be explained to audience without the prerequisite backgrounder.

A majority of people simply do not have the stamina to read long, whatever the reason. And social media does not accommodate nuances very well, whatever the reason. This failure to provide room for context does not do justice to truth, and instead creates room for misunderstanding or disinformation.

This is a challenge for a libertarian like me who believes in free speech but at the same time finding myself exasperated seeing rampart disinformation spread not only directly by humans, but also bots.

In terms of communication, increasingly, there is a move towards graphics. In the past, at least I feel so, graphics were merely an assistive tool. Charts for instance enhance the experience of reading complex proses. It is never easy to read, for instance, the real gross domestic product rose 4.9% year-on-year in the second quarter of 2019 over whatever percent growtn in consumption and import, or the consumer price index increased by 1.1% from a year ago, which was an acceleration from 0.7% year-on-year inflation in the previous month. Each word is contextualized and requires preexisting knowledge. A person unfamiliar with the lingoes would be lost in the sea of letters: level versus flow, base versus base, the second derivative versus the third derivative all happening simultaneously that even the best of us will make mistakes. Math clarifies these things to some levels, but charts will clarify it all the way to the bottom for all through simplification.

Charts can be dumb too, But when it is dumb, it is easy to see quickly with the necessary basic skills, unlike complex verbose proses requiring additional brain power.

And charts are only a subset of graphics. Or infographics… whatever that redundant phrase means these days.

But graphics are becoming more than that now. Rather than an augmenting tool, I feel it is becoming the tool in disseminating information regardless of its truth. This is especially so on social media with respect to political messaging.

So, in the age of information overload that discourages reading and killing nuance, graphics are king.

This reminds me of the days of old when murals in Christian churches, friezes like bas-reliefs, and paintings were the main means of communication at a time when the population was largely illiterate. I remember clearly a famous scene from the Hindu story of the Churning of the Milky Ocean carved on the wall of one of Angkor Wat’s long corridors. The wall would show the Devas and the Asuras of pulling a long large snake acting as a rope wrapped around a mountain churning the Ocean of Milk. I could understand the bas-relief by just looking at it, though to have the full picture, I would have to read the story through text, or have someone taught me the legend.

Perhaps there is a parallel here if we contextualize illiteracy given itself time. In the modern era, illiteracy is turning into the lack of discipline to read textual nuance, while in the past illiteracy was the inability to read text.

The solution to both are graphics, or visual representation of an idea.

When I say history repeats itself, I mean we are down going back to visual representation as a means of popular communication. The then and now contexts of returning back to visual representation maybe different, but it is a repeat of past trend nonetheless.

I have a value judgment to make here on top of this. Perhaps the historic recurrence is damning in the sense that despite our massive advancement and improvement in mass education, we are becoming more stupid collectively. Technological progress in terms of information is becoming so advanced that we cannot cope with it. Relative to the frontier of information, we are being left behind so far as information becomes more massive and impossible to process by us individually without the aid of any machine.

In the past, we individually perhaps could catch up with the frontier of information even as the frontier was expanding. We could get darn close to it if we wanted. We could be polymaths.

However today, the frontier is expanding faster than we can ever hope to catch-up. We are made stupid by our own success. And visual representation is a tool to address our regression that we have to rely on it once again.

Entertainment History & heritage Politics & government

[2871] Kami junjung cita-cita luhur

Puji dan syukur pada Ilahi
Anugerahnya tiada terhingga
Kedamaian kemakmuran
Malaysiaku bahagia

Dengan tekad untuk berjaya
Berbakti pada nusa dan bangsa
Kami junjung cita-cita luhur
Perpaduan seluruh negeri

Seia sekata sehati sejiwa
Menghadapi cabaran
Kami sedia kami setia
Berkorban untuk negara

Bersemarak Malaysia tercinta
Kibarkan panji kebesarannya
Kami rela menjaga namamu
Sejahtera Malaysia

Books & printed materials History & heritage Politics & government

[2863] Reading The Malay Dilemma

Reading is a private experience that takes place within a personal bubble. It is one between you the reader and the author through his or her text. You can read in a group silently or aloud, but chances are most of the time it is a private experience.

During the time you spend reading, the text is your world and the author exercises an authoritarian control over your mind. He or she tries to convince you of something by explaining an idea, describing a scene real or otherwise, or even ambitiously trying to create another world to take your mind away from the real current life we all live in. You have no say for the bubble is not democratic. You can agree or disagree, politely or violently, but the author will always have the final say. Your immediate protestation would be heard by a deaf inanimate object.

Of course you are free to free yourself from the dictatorship, temporarily or for good. Temporarily because something else more urgent in nature is taking place like the likes on your Facebook, or for good because the author bores or disgusts you, or that you simply do not have the stamina to go through it. I have a book claiming to be a complete collection of Franz Kafka’s published work. Reading it mangled my mind so badly that I felt I was at risk of losing my mind. The private bubble of mine was beginning to detach itself from the real world and I was drowning at the shallow side of the river while watching someone, or something, trying to cross it in the most incomprehensible manner. I had to leave Kafka behind to preserve whatever left of my sanity. I would rather be left alone with Critique of Pure Reason instead of The Metamorphosis. Kant would help preserve your mind intact from rationalist assaults. Kafka would consume you whole.

But outside of the personal bubble, you are not free from the gaze of strangers. They may not know what exactly you are reading or thinking. You can create another bubble to exclude a third-party from observing you by reading at a private space, like in your room or at a carrel in a library. But reading can happen in public space too.

I read at various places to pass my time gainfully. These places include the trains during rush hour. While my mind would focus on the text, I sometimes do notice strangers peeking discreetly trying to identify the book I am reading. If our eyes accidentally met, they would pretend to look elsewhere. I sometimes can see judgment made.

I re-read The Malay Dilemma recently. Mahathir Mohamad the author in 1970 (and well, later the fourth prime minister of Malaysia, and if the stars align spectacularly, also the seventh) argued the Malays as a whole due to their feudal and rural background were too polite to fight for their rights and compete with others in the colonial industrial economy. More specifically, he wrote:

“…[W]hat is important, the Malays are told, is that Malaysia must prosper as a nation, and amateurs like them in business are not likely to contribute to this prosperity. All these arguments are completely true. If no impediment at all is placed in the way of total Chinese domination of the economy of Malaysia, the country would certainly be prosperous. The Malay dilemma is whether they should stop trying to help themselves in order that they should be proud to be the poor citizens of a prosperous country or whether they should try to get at some of the riches that this country boasts of, even if it blurs the economic picture of Malaysia a little. For the Malays it would appear there is not just an economic dilemma, but a Malay dilemma.”

The Malay Dilemma. 1981 edition

Mahathir had the book published when he was out in the political wilderness. Tunku Abdul Rahman kicked him out of Umno over policy differences: Mahathir was harshly critical of Tunku. The Malay Dilemma itself was first published just about year after the May 13 racial riots. Mahathir wrote it partly to explain why there were riots and partly to suggest ways to address the Malay discontent in the countryside.

It was a re-read because this time I felt I read it more critically, armed by other sources that better informed me of the 1920s-1960s conditions in Malaya and Malaysia, and also of the high colonial period. I read it with the relevant context in my mind. Books like The Malay Dilemma are always dangerous when read in isolation because its arguments are based on generalized racial stereotypes and if taken as unchallenged complete truth, it has the power to radicalize the mind towards the wrong side of the spectrum. Syed Husin Alatas in The Myth of the Lazy Native criticized many, including Mahathir, for accepting orientalist presumptions wholly and uncritically.

While Mahathir did accept and go far to justify the stereotypes, such as accepting the graceful Malays, to put it politely, as uncompetitive against the 19th-20th century migrants to Malaya, and the Chinese were greedy but intelligent, and the British efficient, the book is also more nuanced than that. It describes partially the economic picture of that time that fuelled Malay discontent. Sources like James Puthucheary’s 1960 The Ownership and Control in the Malayan Economy, perhaps Lim Teck Ghee’s 1971 PhD thesis Peasant Agriculture in Colonial Malaya or even the modern 2014 revisit on wealth by Muhammad Khalid’s The Color of Inequality, I think do corroborate with the picture of mass Malay poverty Mahathir painted. Kua Kia Soong meanwhile is more than happy to paint the whole of 1969 as a Malay peasant revolt, interpreted, perhaps, from communist (Marxist?) understanding of history. The then economic reality was a real contributor to Malay unhappiness that blew up in 1969 and which later gave rise to the 1971-1990 affirmative action policy, the New Economic Policy.

Indeed, deep in the book beyond generalization lies a Keynesian voice. Mahathir praised the free market system but pointed out what he considered laissez-faire market failings, which he believed, and still believes, necessitating state actions. The book not only has a Keynesian voice, but it has an egalitarian one as well spoken through a communal loudhailer. The Mahathir of 1970 showed himself as an integrationist. He almost achieved his dream in the 1990s with his Bangsa Malaysia, except that the means he used to achieve his integrationist dream were unlibertarian and at times felt contradictory.

Some of his solutions appeared reasonable. To pacify the Malay discontent and address the inequality between races, he wanted affirmative action mixed with meritocracy in education so that the Malays could join the modern economy faster. He wanted to urbanize the Malays so that ordinary Malay families would get exposed to the modern life rather than live isolated in the rural kampongs. He wanted to create Malay industry captains so that the Malays in the streets would have role models to look up to.

All three policy recommendations were carried out under his watch. Despite its failings, PTPTN and the mushrooming of tertiary institutions expanded education opportunities for the Malays. Wangsa Maju, Subang Jaya and many others were created as part of Malaysian urbanization that partly benefited the Malays. And then there were Halim Saad, Tajuddin Ramli, Yahaya Ahmad and many others who were Malaysia’s industry captains before the Asian Financial Crisis left the country in ruins.

His other suggestions were quite intrusive, based on extreme distrust of Chinese businesses and guilds. The suggestions included harsh price controls and frequent spot-checks. He went as specific as suggesting standardizing all weighing machines purely because he believed Chinese shopkeepers were cheating their customers.

Some fifty years on, some of his ideas are now obsolete. If I had the chance to sit with him, I would ask if he had changed his mind. Whatever the answers might be, this book is still crucial in understanding Mahathir’s mind.

And regardless of the validity of the stereotypes made by the Mahathir of the Malays and the Chinese, and also of the Europeans, these stereotypes did fuel discontent against the other among the Malays. These stereotypes cannot be dismissed as irrelevant. It had a real world impact on Malaysian politics, and it is true even today unfortunately. Timothy Harper in his 1999 book The End of Empire and the Making of Malaya, the book I am reading at the moment quotes The Malay Dilemma early: “those who say ‘forget race’ are either naive or knaves.”

But the book is mainly known for its stereotypes. Truly, The Malay Dilemma is like Romeo and Juliet. It is book that everybody has heard of, and everybody thinks he or she knows, but pretty much nobody has read it really.

It is not only the book that suffers such reputation. The reader reading it in the public too can suffer a stranger’s judgment. And I am a Malay, who read that book in the train where its passengers were of multiethnic composition

The occasional strangers’ gaze left me uncomfortable in the train. When I began the book, I noticed not the various ethnicities in the car. But while reading it, with those not sharing my skin color standing or sitting next to me, I felt uneasy. I should not feel so for I do not share Mahathir’s racialist worldview. Yet, I did feel uneasy.

That is the cost of reading in public space.

But such discomfort is perhaps less powerful than the political discomfort we live in now. So uncomfortable it is now that some plan not to vote at all in the upcoming general election, citing it as their rights to do so. The robots are so confused after being caught in a false equivalence fork, frozen to decisive inaction.

Economics History & heritage Politics & government

[2835] The economy Mahathir created

New York has the Empire State Building. Think of Paris and the Eiffel Tower comes to mind. Cairo is inseparable from the Pyramids. Singapore has the smaller but not less iconic Merlion. George Town has the Penang Bridge, if you take a liberal view of the city’s boundary and ignore the unpleasant monolith towering over the island.

The Sultan Abdul Samad Building stood as Kuala Lumpur’s chief landmark for almost a hundred years. But on one fine morning in the late 1990s, two bluish skyscrapers dethroned the onion coppered-domes structure as the new symbol of Kuala Lumpur. The Petronas Towers emerged as the world’s tallest building.

This was possible due to one man. He is Mahathir Mohamad, the fourth Prime Minister of Malaysia.

The man did more than merely changed the landmark of the city. The symbolism — the switch from a building of colonial origin to one of contemporary Malaysia — reaches out with a far greater nuance. It represents the Malaysian industrial revolution that happened under his watch.

The reality of Malay feudalism

Before modern Malaysia, the society within the land we live in now was condemned to social immobility. Rarely would a person living at the bottom of the pyramid graduate upwards. If you were born to a common family, then you would be trapped in that world. You would have to be content with little reward for toiling under the unforgiving tropical sun. Only those belonging to the upper echelon had a realistic shot at material success.

Munshi Abdullah in the early 1800s criticized Malay rulers on the east coast for killing a person’s motivation to work. Far too frequently, those in power would confiscate wealth from the common folks, making the reward for work nonexistent for the majority. Capital accumulation for the masses — the recipe for modern capitalism — was impossible for the ruled.

Things improved when the British arrived, especially in the 19th century. Armed with advancement of the European Industrial Revolution, colonial technology increased productivity and brought material progress to Malaya and other parts of the region. Yet, the improvement was largely limited to the crown colonies and the colonial capitalists monopolized the most productive economic sectors, with most of the profits repatriated abroad instead of being reinvested locally. Penang, Malacca, Singapore and other smaller settlements like Kuching and Taiping were of their time, glittering cities benefiting from electricity, street lights, paved roads, schools and clinics, standing apart from the underdeveloped interior where many lived.

From our vantage point today, the situation had barely improved by the middle of the 20th century. Even as Malaya and later Malaysia emerged out of the Second World War, it was unclear if the welfare of the majority had risen meaningfully. Kua Kia Soong is convinced the May 13 race riots in 1969 was a coup by Tun Razak Hussein who rode on Malay peasant discontent against Tunku Abdul Rahman’s overly hands-off policy, as the glow of 1957 Merdeka and the 1963 Malaysia gave way to economic woes.

Mahathir’s industrial revolution

Mahathir’s industrial revolution of the 1980s and the 1990s overturned the highly inflexible calcified society. Fewer sons and daughters of fishermen and farmers took up their parents’ low-paying professions. Capital accumulation became possible for more and more people, freeing them from suffocating unjust feudalism.

They participated in the cogs of modern economy and migrated to the cities at an unprecedented rate. The rapid urbanization created or expanded towns like Petaling Jaya and Subang Jaya — a manifestation of the industrial revolution — to cater to the housing needs of the new urban middle class.

It was not just wealth that began to build up outside of the feudalist circle. Political power did too. Mahathir is the first prime minister who has no blood ties to the royal court. The other Prime Ministers were or are all blue-blooded, with the exception of Abdullah Ahmad Badawi, Mahathir’s immediate successor.

Malaysia experienced its fastest economic expansion in the 1970s — growth in the decade averaged 7.9% yearly — but it was during the 1980s that growth really took off in a manner the man on the street could feel the rising tides. The expansion of the 1990s would have been far greater if it was not for the devastating Asian Financial Crisis. The 1998 recession remains Malaysia’s worst yet.

Malaysian RGDP 1963-2015

Causes of the 1980s-1990s growth

The success of Mahathir’s Malaysia of the 1980s and the 1990s did not come out of vacuum.

The controversial affirmative action New Economic Policy (NEP) formulated in the aftermath of the 1969 race riots permeated the air. An activist government redistributed wealth across the society especially among the Malay populace in the 1970s to appease the peasant discontent, and to create a new and larger urban middle class. But the policy took time to mature and it ripened during Mahathir’s premiership. This was particularly true on the education front. The rapid expansion of formal education up to the tertiary level created enough talents to sustain an industrialization drive.

Equally important in industrializing Malaysia was the role played by Japan. Lee Kuan Yew engineered Singapore’s fantastic rise by capturing capital fleeing communist China’s disastrous 1960s-1970s Cultural Revolution (Chinese capital also fled to Hong Kong and Taiwan even earlier in the 1940s-1950s during the Chinese Civil War that the communists eventually won). Malaysia engineered ours by welcoming Japanese money and technology in the 1980s-1990s.

We have to understand the Japan of that time to understand its role in shaping Mahathir’s Malaysia. The Japanese post-war economic miracle created demand that far exceeded whatever input — labor, land, raw material — that existed domestically. The same problem had brought the Japanese Imperial Amry out to mainland Asia and to the archipelagos down south. The rapid reindustrialization out of the ashes of Hiroshima and Nagasaki used up all the workers the Japanese society could provide. Wages rose precipitously and so did cost of doing business. This was coupled with the 1985 Plaza Accord where major powers of the world agreed to the devaluation of the US dollar relative to the yen. The result: Japanese exports became increasingly expensive and uncompetitive in the US and in other countries where the local currency was linked to the dollar. In those days, the dollar was the effective gold standard.

Rising cost, severe labor shortage and strengthening yen threatened the profitability of exporting Japanese firms like Hitachi, Mitsui and Toyota. In order to remain competitive, they needed cheaper production bases outside of Japan.

Mahathir understood this perfectly and he cajoled Japan to invest in Malaysia in a big way. He succeeded.

Turning east from west

The Look East Policy should be read together with Mahathir’s Buy British Last. Unlike the earlier three Prime Ministers, Mahathir does not remember British rule as fondly. His family was far from the feudalist elites whom maintained close ties with the British. He did not spend his youth in England unlike the previous three prime ministers.

Even in a pro-British environment of the 1970s, Malaysia frequently clashed with British companies over the NEP. British investors then still owned a large chunk of Malaysian industries, especially in the plantation sector. Guthrie alone owned 17% of Malaysian land during the decade. British or European firms controlled 1.2 million out of 1.4 million acres of Malayan rubber plantation in the post-war period. James Puthucheary in his 1960 classic Ownership and Control in the Malayan Economy describes how strongly the British controlled the local economy in all sectors at that time.

Quoting a 1948 report, Puthucheary wrote “the control of Malaya’s most important industry by a ‘handful of large firms’ is the basis of the great political power wielded by them.” Indeed, the 1948 Emergency was declared only after the High Commissioner Edward Gent was pressured by British planters to do so, as recounted in Noel Barber’s The War of the Running Dogs. Gent was even removed from office because the planters did not like him. And the armed contest was called an emergency instead of a war only because the planters were worried insurers would refuse to cover losses arising from the conflict. But the Emergency was, in every respect, a civil war.

The Malaysianization of the domestic economy that began under the NEP — financed by oil windfall of the 1970s oil crisis — reached its climax under Mahathir when he sanctioned a 1981 dawn raid of Guthrie at the London Stock Exchange that ended with Malaysia owning the plantation major. Today, Guthrie is part of Sime Darby, which itself was acquired by the Malaysian government in 1977.

The hostile corporate maneuver of 1981 broke the Malaysia-Britain ties. So, Mahathir needed a new friend. Japan was looking for one too.

The two industrialization policies

Japan supplied the money and the technology but the inspiration for industrialization came from the four original Asian tigers. Hong Kong, Singapore, South Korea and Taiwan all became rich by exporting manufactured goods to the world. Malaysia and Thailand — perhaps less successfully, Indonesia and the Philippines — adopted the export-led industrialization with vigor beginning in the 1980s.

Singapore in particular has a special love-hate tie with Malaysia. After two years as part of the Malaysian federation — and for a longer time part of Malaya — Singapore was booted out in 1965. For some in Malaysia, seeing Singapore thriving instead of suffering since then must have been vexing. Mahathir could never have a sustained friendly tie with Singapore or with Lee Kuan Yew, a British-educated lawyer who had labelled the Singaporean-educated medical doctor from Kedah as a Malay ultra. The Mahathir-Lee rivalry must have inspired the former to play the catch-up game with Singapore, out of honor and ego.

Industrialization happened and Malaysia radically shifted its emphasis to exporting manufactured goods such as air-conditioners, refrigerators, televisions and computers from merely selling raw material like tin and rubber. The policy shift created jobs just decades ago did not exist.

Mahathir was not the first Malaysian leader who saw manufacturing and exports as the new growth engines. Penang under Lim Chong Eu figured it out first in the 1970s by inviting American corporations to invest there and subsequently turned Penang into the Southeast Asian hub for electronics manufacturing. But it was Mahathir who scaled the model up at the national level.

He did not just press for export-led industrialization. He also pursued import substitution industrialization by establishing heavy industries like steel-making and automotive. Perhaps he was unsure if he could succeed with pro-export bias only and as a precaution, he bet on two competing horses. Mahathir had a good role model to follow. South Korea believed in import substitution too and achieved great success with it.

Unfortunately for him, only one of the horses finished the race in good health. His export policy worked marvelously but the import substitution lost steam along the way.

The easiest example of the failed import substitution policy is Perwaja, which made billion of ringgit of losses due to mismanagement, corruption and bad business model. Malaysia still has a steel industry despite the failure of Perwaja — a hung up from the Mahathir days — and it remains uncompetitive till this day. Domestic steel producers regularly lobby the government for protection from steel imports, unashamedly asking the public to pay for their losses.

The more interesting case is Proton. The whole enterprise got off to a good start in the 1980s with the help of Mitsubishi. The biggest factor contributing to Proton’s early success was the government support it received. Mahathir restricted competition by imposing astronomical tariffs on imported cars while refusing foreign car manufacturers the licenses they needed to produce in Malaysia. In a car-oriented society, a car was a necessity and most could afford Proton only.

But the success did not last for long.

Instead of following the Malaysian path, Thailand invited the likes of Toyota, Honda, Ford and General Motors to manufacture and assemble vehicles in Rayong. A great automotive city came to being south of Bangkok and turned Thailand into the largest vehicle manufacturer in Asean.

The implementation of the Asean Free Trade Area abolished import tariffs on all Asean cars. Proton too long addicted to protectionism, now had to compete with the automotive giants located up north.

The Malaysian carmaker competed badly. The Thai production was set up with the regional market in mind unlike Proton, which was and still is focused on the far smaller domestic market. That means Rayong manufacturers have the economies of scale Proton does not. It cost Thailand less to build a car than Malaysia could.

Proton lost the race by the 2000s. In 2016, it begged the Malaysian government for MYR1.5 billion just to survive. The Najib government bailed it out and it unlikely to be the last. The establishment of Proton has led to the creation of a long and complex supply chain which the government just cannot let fail out of political considerations, a legacy issue from the NEP as well as from Mahathir’s policy.

Foreign technology, foreign money and foreign labor

Regardless of import substitution failures, Malaysia industrialized.

Just like Japan, the 1980s-1990s Malaysian industrialization led to labor shortage. Export-oriented industrialization made the world the market. Yet, the 1981 Malaysian population of 14 million could not provide enough local hands to man the factories and build new office towers. The population size grew to 19 million by 1991 but still it was not enough. The economy was simply growing much faster than Malaysians could make babies.

Mahathir imported the workers Malaysia needed. The Petronas Towers were built by Japanese and Korean engineers, Malaysian oil money and Indonesian sweat. Without these foreign workers, the twin towers would not have been built and Malaysia would have unlikely to develop as fast.

This is an obvious historical parallel to the immigration of the late 20th century. When the British first introduced agricultural plantations and large-scaled mining, they quickly discovered the Malayan labor pool was too small to support their new economic endeavors. Syed Hussein Alatas in The Myth of the Lazy Native believed the Malay commoners refused to participate in these enterprises after witnessing how badly workers were treated on the plantations and in the mines. Life in the peaceful kampongs felt like paradise versus the hell within the mines. Yet, industrial production was the future, not subsistence activities. The British solved the problem by bringing in foreign workers from China, India and Java, who later became citizens of Malaysia.

Mahathir wanted Malaysia to have 70 million people by 2100. But rising prosperity is a potent birth control device. The average nuclear family size by early 2000s fell to about 4 persons a family from roughly 5 in the 1980s. It probably averaged 6 earlier. The United Nations projects by the end of this century, the Malaysian population will stabilize at around 41 million people from the current size of 31 million people. Immigration is likely the only way to achieve 70 million people target, if it is still a goal of the current government.

Some of these new immigrants will join us as citizens of this country if we intend to sustain our economic growth, changing the demographics of this land yet again. The alternative is Japan, a rich and advanced society, but with a shrinking population and a bleak future.

Loosening up of the NEP

One thing that stood in the way of export-led industrialization was the NEP as it imposed a 30% Bumiputra equity requirement on various sectors. Foreign investors did not like surrendering control of their investment to somebody else and they could simply go somewhere else — Thailand and Indonesia were the obvious alternatives — if they could not get their way. Despite being the author of The Malay Dilemma and an earlier proponent for the NEP, Mahathir was pragmatic. He abolished the requirement for foreign manufacturing as an expanded manufacturing would lift all boats up.

In 1986, foreign investors were allowed to hold 100% equity if at least half of their output were exported. By 1998, they were permitted to have 100% equity regardless of export level as the government tried to stimulate an economy battered by the Asian Financial Crisis.

Coupled with various tax incentives, the abolition spurred investment into manufacturing. Industrial free zones with minimal customs supervision popped up like mushrooms after the rain in Selangor, Penang and Johor. Non-Japanese companies like Intel, Dell and Texas Instruments set up plants in these zones. By the 1990s, manufacturing made up a quarter of the country’s economic output in contrast to 1965 when it was only a tenth and when agriculture dominated the economy. Malaysia was transformed radically then well before Najib Razak’s transformation programs.

Source: EPU

From industry captains…

Mahathir was still obsessed with hitting the 30% Bumiputra equity target despite abolishing that quota requirement for foreign manufacturers. With the NEP ending in 1990, he was at risk of coming short. He addressed that by picking and nurturing a cohort of Malay industrialists to help him achieve that goal.

Privatization was the favorite means by which the Mahathir government used to create the Malay industrialist class. It also killed two birds with one stone, as privatization tackled the problem of bloated inefficient government by cutting public expenditure.

Mahathir had inherited a monster of a government when he first came to power. Public spending had expanded greatly in the 1970s as the government sought to fulfil its NEP redistributive objectives. Public agencies and enterprises employed more and more people while disregarding the negative effects that had on efficiency.

The government would have been able to sustain the whole NEP spending if it was not for the mid-1980s recession. Oil, tin and rubber prices collapsed. Government revenue was depressed. Deficit widened. The government’s own import substitution initiatives cost money. One could not have one’s cake and eat it too.

A choice had to be made and Mahathir pushed the privatization drive through. Among the beneficiaries of the action were Tajuddin Ramli, Yahya Ahmad and Halim Saad. Malaysia Airlines, Celcom, Hicom and many others were privatized to the new Malay industrialists. Funnily enough despite not attending the school, Mahathir’s policy gave rise to the so-called ”MCKK mafia” — a circle of Malay College men whom dominated the Malaysian corporate scene prior to the 1998 recession. Beyond the elite circle, the floating of government enterprises on the stock exchange gave a wider segment of the Malaysian population a chance to participate in the equity market.

There were Chinese and Indian entrepreneurs who enjoyed government support too. They went on to build companies like YTL, Genting, Berjaya and Maxis. One must not forget YTL was one of several companies that benefited massively from the first generation independent power producer (IPP) policy, arguably at the expense of Tenaga Nasional and the public. The IPP saga is a reminder that while the 1980s-1990s privatizations bore dividend, it also had its cost. The cost manifested itself spectacularly during the 1997-1998 Asian Financial Crisis.

…to crony capitalism

These individuals and companies were linked to the government, and Umno, through privatization of government enterprises, the award of government contracts or the granting of monopoly over a particular good or service. Edmund Terence Gomez and Jomo Kwame Sundaram wrote a 1997 book detailing the extensive links these businesses had with Umno and Barisan Nasional. There is no doubt that they financed Umno while industrializing Malaysia.

As the 1990s boom peaked, these celebrated companies making up Malaysia Inc. were slowly perceived as corrupt villains. The term cronyism entered the Malaysian vocabulary. The NEP, which was meant to help the masses, was now criticized as an excuse to fatten the selected few. Many laypersons believed the NEP had been corrupted.

The accusation of cronyism and corruption was not far from the truth. During the Asian Financial Crisis, many of these privatized companies were bailed out by the government. In 1998, state-controlled MISC bought the heavily indebted and financially stressed Konsortium Perkapalan for $220 million. The latter was controlled by Mahathir’s son, Mirzan. Many other industry captains nurtured by Mahathir had to be bailed out too.

The economic stress led to differences between Mahathir and his deputy, Anwar Ibrahim. Anwar, unceremoniously fired from office by Mahathir, later mounted a massive opposition against the government, demanded reformasi and opened a new contested chapter of Malaysian politics.

The Asian Financial Crisis

Mahathir liberalized the economy after a decade or two of NEP. The Asian Financial Crisis forced him to reverse the course.

Firms across Asia had borrowed heavily in foreign currencies during the 1990s economic expansion. In good times, servicing the debt was easy. But by mid-1997, local Southeast Asian currencies crashed and it increased these companies’ debt burden by multiple folds, automatically rendering them beyond sustainability. It began with the collapse of the baht and it developed into a full-blown regional contagion. The ringgit was not spared. Bankruptcy was inevitable for many across multiple countries.

NPL during 1997 AFC

The International Monetary Fund had proposed Malaysia let these businesses — including those helmed by Mahathir-linked industry captains — fail. In return for an emergency fund, the IMF also proposed the adoption of an austere fiscal policy to strengthen the ringgit. The idea was that if the ringgit recovered, it would reduce the debt burden.

Mahathir would have none of that, in contrast to Indonesia, Thailand and South Korea. He famously stood up, turned his back and did the opposite of IMF recommendations. Malaysia imposed capital controls and pegged the ringgit at MYR3.80 to a dollar. His Keynesian economic prescription shook the realm of orthodox macroeconomics, just as he shocked the world by coming down on Anwar Ibrahim in the most disagreeable manner.

Malaysian ringgit VS US dollar, 1970-2015

Malaysia Airlines and Renong were saved. Danaharta bought bad loans in the domestic system. Danamodal recapitalized domestic banks straddled with bad debt. Megaprojects like Bakun ran aground and needed public money to go on. Companies managing the light rail transit and the monorail systems were acquired by the government too; they were later restructured into Prasarana Negara and RapidKL.

These companies — the success story of Mahathir’s privatization effort — failed and were renationalized. They would later come primarily under the control of Khazanah Nasional, Malaysia’s sovereign wealth fund.

With mandate from Prime Minister Abdullah Ahmad Badawi — Mahathir’s successor — Azman Mokhtar working from Khazanah’s office on level 33 of the Petronas Towers transformed these so-called government-linked companies into the biggest corporations in the region. Corporate governance was improved and so did profitability. The turnaround has been so successful that these GLCs are often accused of crowding out the private sector out of the market.

The current success of these GLCs is a happy outcome of the 1990s bailout. But some things never change. Malaysia Airlines and Proton are still in trouble after all these years.

It would take the IMF more than ten years later to write a mea culpa — admitting austerity did not work — as the organization grappled with the 2008 global financial crisis and the subsequent European sovereign debt crisis.

But even as Mahathir’s supporters cheered the apology, lingering in the background are questions of what if. Would Malaysia have rid itself of cronyism if things had been left burned to the ground in 1997 and 1998? Would there have been a substantial structural reform if Malaysia had listened to the IMF? Would Malaysia get a better democracy if the Umno network was left to fail? Would 1MDB exist in that alternative history?

What if, what if. We can only speculate as we live our life today.

Are we there yet?

But even as projects abandoned, industrialists bankrupted, debt restructured and companies bailed out, by the late 1990s Malaysia was no longer a third world country. New terms were used to describe us: ”newly industrialized economy” and ”upper middle income country” were two among several. That is Mahathir’s achievement for us.

But despite resigning in 2003, the Mahathir project is still unfinished. It is a country on the cusp of something great, but it is not quite there yet. For all the material advancement we have achieved, something intangible is missing. Mahathir dug a deep hole to build those tall Malaysian towers. He ravaged Malaysian institutions to stay in power, and killed off political rivals that could bring Malaysia to greater heights.

Prime Minister Najib Razak vows to complete the task of turning Malaysia into a developed country by 2020. He thinks he can fill the hollow cavity inside us all by building a bigger economy, by pouring in more money and dig other holes elsewhere.

That is folly. Money can buy you only so much.

Mahathir realizes this only belatedly. That is his, and our, failure.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

  • real GDP chart: World Bank, my calculation
  • GDP composition chart: Economic Planning Unit
  • debt obligation chart: World Bank
  • ringgit chart: Bank Negara Malaysia

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published for the Era Mahathir exhibition at the Ilham Gallery in July. The exhibition runs from July to November 20 2016.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — I have been criticized for ignoring Sabah and Sarawak. Perhaps I should have mentioned how the Malaysian industrialization was really a West Coast industrialization. I should have highlighted the geographical disparity of the 1980s and the 1990s industrialization as I highlighted the economic disparity between the cities and the interior during colonial times. For better or for worse, such focus is usually due to the logic of agglomeration. There is also the curse of history: it is easier to develop a place that has the basic infrastructure in place.

But perhaps that is a work for another person. It would be interesting to see what Sabah and Sarawak-specific industrialization was like during Mahathir’s time, though I would imagine, it would mostly be about oil and gas. For Sarawak in particular, perhaps an investigation in the roles of Cahya Mata Sarawak in the state’s industrialization drive.