Malaysia makes bold changes in race-based policies

The economic downturn is allowing Malaysia's leader to chip away at an affirmative action program for Malay Muslims that has been considered virtually untouchable in the past.

Soon after taking office in April, Prime Minister Najib Razak scrapped a requirement for 30 percent Malay ownership of companies in certain service industries. This week, he cut the ownership requirement to 12.5 percent for companies that want to list on the stock exchange.

Najib, who is Malay, has also promised to award more government scholarships next year based on academic excellence, rather than racial quotas.

The moves are carefully calculated to avoid angering Malay voters. They touch only a few of the benefits given to Malays, who make up nearly 60 percent of the country's 28 million people. Still, even these changes would have been unthinkable not long ago. Whether they go further will depend on the Malay reaction and whether the economy recovers.

"What Najib has done is to change the way the game is being played, but the game is still on," said James Chin, a political science professor at Monash University in Malaysia. "Malays are still being protected and given things on a silver platter."

Two developments have opened the door to change.

Malaysia has fallen into recession for the first time in a decade, giving Najib political leeway to relax the rules on Malay ownership in a bid to woo foreign investment.

Meanwhile, Najib's ruling coalition is facing its first severe challenge since coming to power in 1957. And the challenge is fueled in part by anger among ethnic Chinese and Indians about affirmative action for the Malays. Chinese are about 25 percent of the population, and Indians, 8 percent.

The relaxing of affirmative action could help Najib's coalition, the National Front, regain the support of Chinese and Indian voters, who overwhelmingly deserted the government in elections last year.

The National Front lost its long-standing two-thirds majority in parliament and lost control of five of the Southeast Asian nation's 13 states, the worst performance in its five decades in power.

"He is hoping to get the economy back on track and win back the non-Malay ground," said Chin, who thinks Najib may call an election in 2011. "Everything he is doing now is to gear for the next general elections."

The government introduced affirmative action in 1971, following 1969 riots fueled by Malay discontent with the relative affluence of the ethnic Chinese. Dubbed the New Economic Policy, the program gives preference to Malays in government contracts, business, jobs, education and housing. It is credited with lifting millions of Malays out of poverty and creating an urban Malay middle class.

The 30 percent ownership requirement was dropped for manufacturing in 1998 to encourage foreign investment in export-oriented factories, which have powered Malaysia's growth. Now, Najib is cautiously relaxing the requirement for the service sector.

So far, the reforms have not aroused any open anger among Malays. Najib describes them as a "tricky balancing act."

He says he remains committed to raising Malay corporate ownership to 30 percent from the current 19 percent. It stood at 2.4 percent in 1970, before the New Economic Policy was launched.

The government will set up a 500 million ringgit ($143 million) equity fund to buy private companies and hand them over to Malay managers, with an eventual goal of enlarging the fund to 10 billion ringgit.

As well, the 30 percent Malay ownership requirement remains for "strategic industries," which includes telecommunications, water, ports and energy, home to some of Malaysia's largest companies.

Nevertheless, there are worries among some Malays.

"It is fair and will make Malaysia more competitive but at the same time, there is concern that Malays will be completely shut out of mainstream commerce," said Azim Zabidi, a businessman and leader in Najib's party, the United Malays National Organization.

"You still need the NEP to ensure that Malays are given the kick-start and not lag too far behind," he said, referring to the New Economic Policy by its acronym.

The moves so far primarily affect wealthier Malays, who would be able to buy stocks. They don't strip away other privileges such as buying homes at lower prices

"To a large extent, nothing much has really changed," said Philip McNicholas, an economist with research firm IDEAglobal in Singapore. "In repealing the NEP policy, Najib has been careful and selective ... It's a case where he is going to walk a fine line to pick up non-Malay votes while not making enemy among the Malays."