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The Najib administration faces challenges from multiple directions. On economic front, two major factors drive changes in the federal government’s economic policy. One is the global economic turmoil. The other is electoral pressure applied against affirmative action policy favoring the Bumiputra, or mostly, the Muslim Malays.

Both challenges began before the new administration came to power. Najib Razak had the opportunity to address a challenge before he assumed the office on the fifth floor of Perdana Putra in Putrajaya. He assumed the responsibility of Finance Minister early and was credited for launching both stimulus packages announced in November 2008 and later in March 2009.

The stimulus packages have been ineffective so far. Government admitted that spending was slow and further shared that the effect of the stimulus would only be felt in the third quarter of 2009, approximately seven months after the first stimulus was tabled in the Dewan Rakyat.

Nobody is quite sure when the economy would turnaround but signs of improvement are already visible. For instance, demands for electronics are already up, with factories reportedly having trouble fulfilling their orders. There is a good chance that the economy may improve earlier than the estimated period the stimulus packages are estimated to become effective. If that happens, the stimulus may prove to be irrelevant in smoothening fluctuation in economic growth and may really only contribute in creating structural fiscal deficit.

Malaysian federal government has been running on deficit since the Asian Financial Crisis hit the country in the late 1990s. The Najib administration began its era by enlarging the hole in an unprecedented manner: a stimulus totaling RM67 billion comprising of RM21 billion worth of government spending spread over 2009 and 2010.

If the Najib administration is concerned with the size of fiscal deficit and the level of national debt, the government will suffer from severe constraint in its finance and inevitably, its plans.

The deficit will definitely affect the implementation of the so-called new economic model — or more appropriately, a new industrial policy — currently being drafted by the Najib administration. Any respectable industrial policy will require manipulation of tax and tariff structure. This in turn affects government revenue, at least in the short term if the industrial policy is successful. Not all industrial policies have been successful implemented: the clearest failure is the industrial policy on biotechnology.

The impetus for the new industrial policy, from the point of view of the government, is definitely the drawbacks of export-driven model. The export-driven model advocates for reliance on exports as the engine of economic growth. For countries, like Malaysia, which have chosen that path, their economic health is susceptible to economic fluctuations of their trading partners. In the case of Malaysia, mostly, it is the United States of America, the source of recessions in many other economies. It is from this approach in economic development that gives the cliché ”when America sneezes, the world catches cold” its truth.

Impetus asides, the exact details of the new industrial policy are not available publicly currently. The government indicates that actual plan will only be ready later in the year.

The administration has given out some hints however. Key ideas leaked so far are the strengthening of domestic demand vis-à-vis external demand, creating high-skilled based economy, improving the quality of wages of local jobs and reversing — or at least reducing — the rate of brain drain that Malaysia suffers from.

Along with the main ideas, on the sidelines seem to be the rejection of export-driven model and the lessening of reliance on cheap low-skilled foreign labor.

This may implicitly suggest a quest for some kind of independence from the fluctuation of world economic system that one cannot hope of achieving without jeopardizing Malaysia’s future. In a sense, the idea of economic independence is a continuation of the Abdullah administration. The previous immediate administration emphasized on achieving self-sufficiency in food production, signaling the government’s failure in understanding the basic economic concept of comparative advantage. It is a fact that it is cheaper to trade for food — and achieves security of food supply while at it — than to achieve self-sufficiency in food production.

Yet, really, there is nothing wrong in trying to create a local economy with stronger domestic demand manned by high-skilled workers. Those goals can be achieved and indeed, it is desirable to achieve it, without rejecting export-driven model and being excessively hostile to the role that cheap low-skilled labor plays in Malaysia economy.

Full ejection of export-driven model is unwise despite popular current advocating its abandonment. Malaysia has only a small population while there are much larger markets abroad. There is no way on earth domestic demand can absorb the size of external demand, if total demand is to be at least maintained at its current level, unless the real wealth of Malaysians goes up in a very dramatic manner.

It will be all the more impossible to improve domestic demand if Malaysia adopts unwelcoming stance toward foreign workers. These foreign workers do help sustain domestic demand, apart from providing their services. The administration has not shown that it understand that.

Under the stimulus package, the government did plan to impose restriction on hire of foreign workers, which increased the cost of doing business in Malaysia, in times when demands were falling precipitously. That action was postponed indefinitely only after manufacturers lobbied against restriction. If the restricted saw implementation, it would have been a disaster for the manufacturing industry. Malaysian economy could have gone into steeper recession than it would have without the restriction.

Whether the new industrial policy will take cognizance of that is something Malaysians will only know after the government shared the full plan.

Despite that, it is already clear that policy will work hand in hand with liberalization of the economy from instruments relating to affirmative action closely identified with the New Economic Policy, a policy that officially ended in 1990. The frequently debated quota requirement of 30% for Bumiputra in all public listed companies has seen a dismantling along with the very pro-affirmative action Foreign Investment Committee.

The liberalization is partly caused by the realization that affirmative action as practiced in Malaysia is adversely affecting Malaysia’s potential in times when there are other comparable if not better investment destinations, partly by the current economic recession and partly political since Pakatan Rakyat successfully campaigned against the policy.

Of all that Najib has done as either Prime Minister or Finance Minister, the liberalization of the 30% quota reserved for Bumiputra is the boldest of all. The conservative Malay base is likely rattled by the liberalization effort. The courage for that may have come from realization that Barisan Nasional — UMNO in particular — has more to gain by moving to the center rather than appealing to the Malay far right clusters in UMNO. After all, these far right groups have nowhere to go but UMNO. They have no choice.

In this sense, the liberalization of affirmative action is Barisan Nasional under Najib Razak is flanking Pakatan Rakyat. During the election campaign, Pakatan Rakyat more or less advocated the same kind of liberalization. Barisan Nasional is now adopting it. Continuous liberalization of the policy by Barisan Nasional may bring it more votes from the non-Malay groups in the future, at the expense of Pakatan Rakyat.

Regardless of political implication, the good effects of liberalization are unlikely to be felt so soon. As much as the economic downturn seen in Malaysia is caused by drop in external demand, recovery will be driven by external demand too. The sheer size of external demand makes improvement in domestic demand incapable of driving recovery in the local economy. This probably limits what the Najib administration can do in the short run. Such is the curse of a small open economy such as Malaysia.

When the economy does finally rebound however, Malaysia has good chance to capitalize on its new liberalized market environment.

All in all, perhaps there is one term that can describe the economic policy of the Najib administration: pragmatist. When governments all around the world spend, so does the administration. When everybody talks about the end of export-led model, here comes a new industrial policy. And when the voters expressed hostility against affirmative action as called for by the NEP, the government liberalizes the affirmative action. The government bends to whichever direction the wind blows.

First published in Oon Yeoh’s Najib’s First 100 Days: No Honeymoon.