Malaysia's Najib targets affirmative action

In a political gamble, Malaysian Prime Minister Najib Razak has begun chipping away at affirmative-action policies for ethnic Malays in a bid to attract more foreign investment and revive a recession-hit economy.

The move comes as opposition parties continue to pressure the ruling coalition, which has seen its support base crumble among non-Malays. Winning back their support is seen as crucial for Mr. Najib, who took power in April and has vowed to rebuild trust in the government.

In a speech, Najib said Tuesday that public companies would no longer have to allocate 30 percent of stock equity to Malays. The requirement, seen as inefficient and inflexible, has deterred companies from raising capital on Malaysia's stock market.

He also unveiled a series of reforms to liberalize foreign investment in Malaysia, which has struggled to stay competitive with other Asian economies. These include raising caps on foreign ownership and streamlined approvals for inbound acquisitions and takeovers.

"We expect the wider participation of foreign players to raise the level of competition and to promote innovation to drive growth at a faster pace," he told an investment forum in the capital, Kuala Lumpur.

Objections to race-based regulations

Trading partners have objected to Malaysia's race-based regulations. Free-trade talks with the US stalled in 2006, in part because of government procurement rules that favor ethnic Malays. Congressional approval for fast-track negotiations expired the following year without a deal.

Malays make up around 60 percent of Malaysia's 28 million people. Together with tribal groups on the island of Borneo, they are officially classified as "sons of the soil."

Since 1971, Malays have enjoyed a series of entitlements under the New Economic Policy (NEP), which was designed to redress inequality and poverty after deadly race riots in 1969.

In recent years, resentment against the NEP has risen sharply among ethnic Chinese and Indians, stirring racial tensions. Opposition leader Anwar Ibrahim, a former deputy prime minister, has promised to abolish the privileges and tackle poverty regardless of race.

The ruling coalition slumped to its lowest-ever share of the vote in elections in March 2008. A string of subsequent by-elections has been won by the opposition, raising doubts about the government's longevity.

As leader of the dominant United Malays National Organization (UMNO), which has defended the NEP as its birthright, Najib risks stirring dissent in the ranks by taking away their perks. Critics say UMNO insiders are the main beneficiaries of racial quotas, as poor Malays don't own stocks or compete for government contracts.

Benefits for everyone

On Tuesday, Najib argued that a revamped economy would bring benefits to all Malaysians. "We can only achieve our social-equity goals by expanding the pie. A high-income society must be socially inclusive," he said.

Jeff Ooi, an opposition lawmaker for the Chinese-oriented Democratic Action Party, said the reforms didn't go far enough, as the 30 percent equity quota still applies in industrial sectors like energy and shipping. Nor had the concept of the NEP as a means of wealth redistribution been changed.

"The distribution of national wealth shouldn't be based on a racial dimension. It should be on merit," he says.

After decades of export-led growth based on manufacturing, Malaysia faces what economists call a "middle-income growth trap," meaning that it's unable to compete with low-cost producers like Vietnam and India, but not innovative enough to rival rich countries. Added to its troubles is the global slowdown that may cause its economy to shrink this year by 5 percent.

Referring to the growth trap, Najib said the answer lay in a service-based economy that promoted creativity and technology. He said making this transition was his key priority and that Malaysia could become fully developed by 2020.

Jason Chong, chief investment officer at UOB-OSK Asset Management, an investment fund in Kuala Lumpur, said he didn't anticipate a flood of stock listings as a result of the reforms. Companies no longer have to sell discounted stock to Malays, but initial public offerings (IPO) will still be subject to a racial quota of 12.5 percent. While this means that every IPO must make sure that Malays get their share, it is more flexible than the 30 percent rule.

But he praised the emphasis on overhauling a slumping economy. "It's a step in the right direction. He's saying all the right things," he says.