Vision 2020," Which Captures Mahathir's Hope of Propelling Malaysia Into the Ranks of the Developed Countries by the Year 2020
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/5135 PSDOccasional Paper No. 10 September1995 Public Disclosure Authorized Vision, Policy and Governance in Malaysia Public Disclosure Authorized Jomo K. Sundaram, Khoo Boo Teik, and Chang Yii Tan Public Disclosure Authorized Public Disclosure Authorized I The| I World Bank PrivateSector DevelopmentDepartment Private Sector Development Department Occasional Paper No. 10 Vision, Policy and Governancein Malaysia Jomo K. Sundaram, Khoo Boo Teik, and Chang Yii Tan September 1995 The authors gratefully acknowledgethe assistance of Khoo Khay Jin, Henry Loh, and T, Rajayiayan Jn the preparationof this paper. This paper has been cleared for inclusionin the occasionalpaper series by R. Shyam Khemani,Manager, Competition& Strategy. The views expressedare those of the author(s) and sould not be attributedto the WorldBank. This paper forms part of a forthcomingvolume, Leila Fxischtakand zak Atiyas(eds.), "Governance,Leadership and Communication:Building Constituencies for EconomicReform." The World Bank Private Sector Development Department It Contents 1. Introduction .................................... .I The "Fifth Tiger?'? . 1 2. Governance Capacity and Vision .. 3 3. Ethnicity and Class .5 4. Political Economy under the Alliance, 1957-69 .9 5. Economic Adjustment and State Intervention: NEP, 1970-81.13 NEP: Problems and Tensions .18 6. Mahathir's Policies, Reforms, and Vision: 1981-83.21 7. The Political Economy of Adjustment, 1985-66 .23 The Collapse of Commodity Prices.24 The Rise in Public Debt .25 Decline in Private Investment .27 Holding NEP in Abeyance .27 Responses to Adjustment .. 28 8. Consolidation after the Crises: Vision2020 ...... ............................... 31 9. Conclusions .. 35 Bibliography . .37 iii Al 1 Introduction The "Fifth Tiger?" 1.1 For much of the thirty-eight years since it gained independence from British colonial rule in 1957, Malaysia was regarded as a moderately successful, middle-income, commodity-producing, and net oil-exporting developing country. But the last eight years of uninterrupted high, export-oriented, and manufacturing-led economic growth, beginning in 1987 and averaging over 8 percent annually, has transformed Malaysia into a second-tier, newly industrializing country. Now ranked nineteenth among the world's industrialized nations, Malaysia has arguably become East Asia's "fifth tiger," after the Republic of Korea, Taiwan (China), Hong Kong, and Singapore. 1.2 There are several remarkable features in this economic transformation. First, it seems to have started in the late 1980s, in the wake of Malaysia's severe economic recession of 1985-86 and some of its most intractable political crises. Second, the transformation is associated with the privatization, including economic liberalization, launched by Prime Minister Datuk Seri Dr. Mahathir Mohamad, previously regarded as a staunch ideologue of state economic intervention. Third, it appears to have been scripted to follow Mahathir's post-1990 National Development Policy, more popularly known as "Vision 2020," which captures Mahathir's hope of propelling Malaysia into the ranks of the developed countries by the year 2020. Fourth, the economic transformation features a regime "rolling back the frontiers of the state," in a Malaysian variation of the "strong state, free economy" model that was most emphatically advocated by Margaret Thatcher for the United Kingdom in the 1980s. In short, Malaysia's progress since the late 1980s appears to have been a composite of farsighted vision, firm economic adjustment, and high governance capacity. I 2 Vision, Policy and Governance in Malaysia 2 GovernanceCapacity and Vision 2.1 How might this Malaysian experience of economic recovery and transformation illuminate the junctures between the sociopolitical vision of a leader, the governance capacity of a state or regime, and the outcome of economic adjustment under stressful circumstances? It is the objective of this paper to provide some answers to this fundamental question. 2.2 We might first delineate how the concept of governance capacity is used in this paper, albeit without engaging in a theoretical exegesis of the concept. In principle, governance capacity denotes the ability of a state or regime to govern based on a claim to legitimate authority, which is acknowledged and accepted by the governed. Governance capacity may or may not be enhanced by the coercive (even repressive) capacity that all states and regimes retain, and the former should be differentiated from the latter. In practical terms, governance capacity refers to the ability of a state or regime to set, shape, offer, gain acceptance for, and implement its agendas-the social, economic, and political agendas, subject to variations or changes depending on circumstances that cannot be determined in advance. 2.3 It is assumed that social groups, vested interests, and political forces will exhibit a variety of responses to these agendas, including support, indifference, criticism, and rejection. Some of these forces may well contest the state or regime agendas with their own alternatives. Thus, a regime may be said to have a high governance capacity if it can consistently gain a sufficiently broad acceptance of its agendas in competition with the alternatives. In multiethnic societies with class divisions cutting across the ethnic groups (such as Malaysia), a regime's governance capacity probably hinges on its ability to promote its agendas as national rather than merely sectarian, or to frame its public discourses as universalizing instead of particularistic. This applies even if the agendas and discourses address limited ends or narrow interests (as, indeed, they frequently do). 2.4 A leader's "vision" may mean quite different things to different social classes and ethnic communities, reflecting competing, if not antagonistic, claims. Thus, acceptance of a leader's vision may be grudging or forthcoming depending on whether it can be shared rather than imposed. This may be critical when a regime undertakes a stringent program of economic adjustment, and can only promise the populace, or certain segments of it, future gain in exchange for immediate pain. 2.5 But governance capacity is not merely a function of persuasion and discourse. It is grounded in the performance of a state or regime, or its success or failure in carrying out policies, programs, and projects it is committed to implement. If an overarching policy with 3 4 Vision, Policy and Governancein Malaysia clearly established objectives and targets exists (such as Malaysia's New Economic Policy), a regime's governance capacity will be enhanced by their attainment; conversely, it will be impaired by inadequate performance (whatever its root causes may be). Similarly, vision endures and captivates to the degree that experience suggests that it works. 2.6 On the basis of the above understanding of governance capacity and vision, this paper provides a comparative study of two Malaysian experiences with economic adjustment. The first involves the New Economic Policy (NEP), which was promulgated in 1970, with planned implementation to extend until 1990. The second is based on Mahathir's policy initiatives and management of the economy, especially after 1986. Although Mahathir's premiership began in 1981, and several of his major policies were attempted between 1981 and 1985, this paper focuses on Mahathir's policy responses to the Malaysian recession of 1985-86, later consolidated after 1990, particularly in the form of Vision 2020. To set the stage for such a comparative study, the paper provides an overview of Malaysian society and political history and discusses the failure of the first postcolonial regime to solve critical problems of political economy in Malaysia's "race and class" society. 2.7 This paper seeks to demonstrate that while vision and governance capacity facilitate successful economic adjustment, their roles are neither fixed a priori nor unchanging in relation to economic constraints and political realities. It cautions against any mechanistic assumption that vision supplies a blueprint for adjustment, while governance ensures its implementation. It is hoped that the paper will illustrate that the Malaysian experience with NEP and Mahathir's Vision 2020 raise the general propositions that vision can be an outcome of economic failure as well as a precondition for successful adjustment, and high governance capacity facilitates, but is also constrained by, adjustment performance. 3 Ethnicityand Class 3.1 To help us understand and analyze these issues, it is useful to begin with a quick overview of Malaysian society and politics. Geographically, the country is made up of two major entities. There is Peninsular Malaysia-that is, the Malay Peninsula-which is contiguous with the land mass of Thailand to the north, and linked by a causeway to the island-state of Singapore to the south. The other region of Malaysia consists of Sabah and Sarawak on the northwestern flank of Borneo Island, the rest of Borneo being the small state of Brunei, and Indonesian Kalimantan. This region was once referred to as East Malaysia, but the name has been dropped from official use. 3.2 The federation of Malaysia includes a total of thirteen states, with eleven states in Peninsular Malaysia, which made up the Federation of Malaya until 1963. The Federation of Malaya merged with Sabah, Sarawak, and Singapore in 1963 to form Malaysia. Singapore, however, separated from Malaysia in 1965 as a result of irreconcilable differences between