October 11th, 2016 by
Hafiz Noor Shams
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 19
th
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 20
th
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.
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 20
th
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.
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.
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.
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.
Sources:
- real GDP chart: World Bank, my calculation
- GDP composition chart: Economic Planning Unit
- debt obligation chart: World Bank
- ringgit chart: Bank Negara Malaysia
First published for the
Era Mahathir exhibition at the Ilham Gallery in July. The exhibition runs from July to November 20 2016.
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.
My comments:
The prosperity of Peninsular Malaya is at the expense of the two colonies, namely, Sarawak and Sabah. The devil squandered at our expense. The public-funded so-called national Bhd and Petronas had all run to satisfy his desires and ambitions.
Now he wants to start the third car company, the S-bridge ....at people's expense. Look, he gains all no matter how losses incurred. It is I gain means I gain. I lose means you lose. He ran the country in his egoistic way. The so-called Nasional Bhd companies he has created are the monsters to eat all. That is why people have to bear the losses for all these devils. IMDB is just another monster Najib created based on Mahathir's model.
