Free-Market System Turns Malaysia Into Thriving Industrial Economy

AFTER studying accounting and finance in England for five years, Pretta returned to Malaysia's capital, Kuala Lumpur, to be greeted by plenty of job offers and a country that had made huge economic progress.

The Malaysian-born Indian had left during the height of the recession, when prices for rubber and palm oil, Malaysia's principal exports had bottomed out. Now the country counts air conditioners and semi-conductors among its main exports.

By 1992 agriculture accounted for only 17 percent of national output and industry had risen to 29.3 percent.

For example, Sime Darby, one of Malaysia's largest companies with roots reaching back to the country's colonial past, has long ceased to be just a rubber plantation owner. It has become a major tire producer and operates a $38-million research center for tire technology together with Japan's Sumitomo Rubber.

With a population of 18 million, Malaysia has become more prosperous. It has recorded constant growth rates above 8 percent and attracted large amounts of foreign investment.

Prime Minister Mahathir Mohamad, who has led the country since 1981, uses a mixture of third-world solidarity and anti-Western rhetoric in his speeches. However, the former medical doctor enthusiastically supports a free-market system, though managing it in a comparatively authoritarian style.

Dr. Mahathir has aggressively started privatizing the nearly 250 state-run enterprises. Key utilities and telecommunications enterprises have been sold off.

The privatizations have fueled a boom in the capital markets. The Kuala Lumpur Stock Exchange has the highest market capitalization in Southeast Asia and stock prices have been performing well.

Rapid industrial expansion has led to a labor shortage, with fast-rising wages adding to inflationary pressures. The 1992 inflation rate of 4.7 percent was low by Asian standards, but high compared to Malaysia's average inflation in the past of 2 to 3 percent. The regulatory authorities have reacted with restrictions on consumer credit. Economic growth this year is expected to be 7.6 percent, down from 8 percent in 1992. Central Bank Governor Tan Sri Jaffar sees the slowdown as "a blessing in disguise."

Nearly two years ago, Mahathir embarked on his much-touted Vision 2020, a plan intended to turn Malaysia into a fully developed country by the year 2020. It foresees a population of nearly 30 million with four times the present per capita income of $2,500. The plan assumes constant 7 percent growth a year.

Mahathir's Vision talks of a society that is democratic, tolerant, and united. While still a medical practitioner, Mahathir saw a bleak future for his fellow ethnic Malays. Comprising 50 percent of the population, the Muslim Malays held a mere 2 percent stake in the economy. The economy was dominated by ethnic Chinese - 30 percent of the population - and Indians.

The government's New Economic Policy (NEP), set up after riots in 1969, systematically has favored ethnic Malays economically and educationally to correct the imbalance. Two decades later, Malays hold about 20 percent of the economic means, more than 10 percentage points short of the NEP goal. Today, the government says ethnic Malays must stand more on their own feet.

Malaysia is not considered cheap for low-cost mass production. Wages are about 10 times those of neighboring Indonesia. So the government is trying to attract high-tech industries and develop the service sector.

In the hope of attracting capital leaving Hong Kong Mahathir plans to establish an offshore financial center and tax haven in the tiny island of Labuan, 50 kilometers (31 miles) from Brunei in Eastern Malaysia.