Wednesday, January 30, 2013

How will the 2013 Malaysian election affect the economy?

Senior economists at investment houses JP Morgan Securities and Eastspring Investments Berhad have been quoted as saying that investors will act negatively if the opposition wins the upcoming Malaysian election.

However, it is too simplistic to say that a victory for the opposition will have a completely positive or absolutely negative effect on the Malaysian economy. The truth is more likely to lie somewhere in between these two extremes.

Ideologically speaking, the Malaysian opposition coalition is similar to the ruling Barisan Nasional (BN), as both coalitions subscribe to market-oriented economic policies. Both the BN and the opposition accept the value of FDI, the role of multinational corporations and the importance of trade.

The media has depicted the leader of the opposition, Anwar Ibrahim, as being close to the West and some oil-rich states in the Middle East. More generally speaking, media reports indicate that he is close to international capital. If that is true, then it is more than likely that he will use his influence to attract more FDI and portfolio funds.

Regardless of who rules the country, economic realities must be taken into account: Malaysia is a small, open economy that has to rely on foreign investment and trade to drive its growth. Neither of the potential leaders — Najib Razak nor Anwar Ibrahim — can deny this. Whichever party comes to power after the 2013 election will race to liberalise the economy. Differences, if any, will lie only in the manner or pace at which this is done.

The United Malays National Organisation (UMNO), a founding member of the BN coalition, claims to be the sole champion of Malay rights, and the only party that can ensure that Malays (the bumiputera) achieve a fair share of the nation’s wealth. Nevertheless, in its attempts to enjoy the benefits of free trade agreements, the government has slowly reduced some of its preferential treatment for bumiputera businesses.

The bumiputera entrepreneur development programs that some government-linked companies have created will have to end. The scheme to restrict petrol kiosks only to bumiputera businesspeople will similarly have to be cut back. Bumiputera vendors associated with the national automobile project will soon become more sensitive to market forces as the government ceases to protect this industry. The recently enacted Competition Act does not exclude bumiputera business from its ambit.

While the UMNO has to take care of its constituency, protectionist policies will need to be addressed if the Trans-Pacific Partnership Agreement and the EU–Malaysia free trade agreement are signed. The government no longer has the sort of free hand it once had to extend preferential treatment to promote the growth of bumiputera business.

Will the opposition act like the BN if it comes to power? Perhaps not. One of the opposition’s key policy platforms is transparency. The other platform is the eradication of wastage and leakages from the system. The opposition also speaks about improving the economy as a whole, rather than just the economic wellbeing of particular racial groups — like the bumiputera.

Fiscal policy is another critical area that demands attention in Malaysia. The Malaysian government’s policy of repeated fiscal deficits, especially when they are not needed, has to be addressed. This is an issue that the opposition has shown an interest in resolving, and it is a development that could improve Malaysia’s rating in the eyes of foreign investors, as well as placing the economy on more solid ground.

Another important issue is that of government expenditure. This raises two points. The first is projects and policy initiatives that involve high levels of government expenditure. It would be wrong to say that the opposition is opposed to spending on big-ticket items. They are unlikely to be averse to these projects in principle. Rather, it could be expected that the criteria for commitment to these projects will be assessed on their usefulness, efficiency and projected returns. As the opposition’s policy platform outlines, there would be greater accountability and transparency in undertaking these projects.

The other point pertains to the execution of ongoing projects. Legal requirements prevent the opposition from discontinuing projects that the government has already commenced. It would be wrong and to the opposition’s disadvantage to delay projects perceived to be in the national interest.

In truth, there is likely to be a balance of views among economists regarding the outcome of the 2013 Malaysian election. Those set on the long term, and those who see the prospect of economic reform, will be more positive in their evaluation. Those with their noses stuck in the very short term will wait to see how effectively the new government can run its business of managing the economy. Investors are likely to be bullish if the opposition projects confidence in the first months after their victory — that is, if they do in fact win.

Shankaran Nambiar is an economist who consults for national and international agencies. He lives in Kuala Lumpur. East Asia Forum

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