Malaysia’s New Economic Plan Remade its Society

Author’s note: If you want to start off with the video, you can see it below:

When I think about radical distribution policies, I can never get away from the Malaysian situation. Recently, the news coming out of Malaysia has been pretty negative - relating to Jho Low and the 1MDB corruption scandal - and that really sucks, but it distracts away from the relative economic success that Malaysia has seen in the past few decades.

Something that I think that the video does not emphasize well enough though is that Malaysia the country is blessed with great natural resources including oil. The oil boom enlarged the pie as a whole and that meant that the people were comfortable redistributing its slices amongst themselves. It reminds me of Taiwan’s situation in the 80s and 90s with its universal health care system. The economy was booming and the government had enough money right then to implement and pay for it.

As the world transitions away from petroleum, we should keep an eye on the economic situation and see if it could potentially lead to future strife.

---

Yes, I have a Patreon now. Ad income is always volatile but coffee always costs the same. I do want to call out a nice perk. I make videos pretty far ahead of the schedule, but they are queued up in YouTube waiting to be released. The Early Access tier lets you watch all those videos right now ahead of time. The number of videos will fluctuate but right now is at 8. You can watch those right now if you get the Early Access tier. Thanks and hope you stay well.

---

Malaysia is an interesting country. Located in Southeast Asia, its population is made up of the native Malay people along with substantial minorities of Chinese and Indians. Malaysia has one of the largest populations of overseas Chinese in the world. 

It is also one of the more successful economies in Southeast Asia. Growing at an average of 6.5% per annum over the 50 years after Independence, the Malaysian economy is doing well on the whole. Social stability between the races are decent. 

It was not always like this. In the late 1960s, the country found itself gripped in racial turmoil. Then in 1971, the Malaysian government embarked on a 20-year radical restructuring of its economy. No, its entire society.

The plan was called the New Economic Policy ("NEP"). The NEP rewrote the social contract between the Malays and the Chinese. It is pretty intense, yet the Wikipedia page is oh so dry. In this video, I want to talk a bit about it. 

Malaysian Race Riots 

In 1951, there were 2.6 million Malays, 2 million Chinese, and half a million Indians. Exiting British colonial rule after World War II, the country was gripped by race riots between the Malays and the Chinese. 

The Malays, as the majority race, were granted a privileged political position in the Malaysian Constitution. However, most Malays lived in rural areas and were quite poor. By 1970, Malays made up 74% of poor households in Malaysia. 

The Chinese were the junior political partner but dominated the country's wealth and economy. They were more likely to live in urban areas and enjoyed higher incomes - with a mean monthly household income of $387 (Malaysian currency) as compared to the $178 from the Malays. 

More significantly, Chinese owned more equity share of Malaysia's companies. 34.4% as compared to the Malays' 2.4%. Both populations pale though compared to what the former British colonialists owned - 63.3%.

This inequality engendered resentment between the two populations, triggering riots. Race riots had also led to Singapore's expulsion from a federal Malaysia five years earlier in 1964. 

Singapore, as you might recall, is a Chinese-majority state. Tensions between Singapore and Malaysia's ruling parties could not be resolved. Singapore's People's Action Party called for equality for all Malaysians. The United Malays National Organization, the Malay political party in Malaysia, saw this as challenging the Malays' privileged position. 

The resulting discord would lead to Singapore's expulsion and foreshadow the much bigger rash of race riots 5 years later. The 1969 riots would require the intervention of the military and lead to dozens dead. 

At this point it became clear that work needed to be done to ameliorate and rebalance this massive inequality within Malaysian society. The UMNO, the party representing the native Malays, took the lead in creating this plan. Politically, they are generally hardline economic nationalists, specifically looking out for the interests of the Malay natives. 

Such hardline feelings towards the Chinese minority were pretty dangerous considering the recent race riots. So the UMNO sought some (not a lot, but some) feedback from the Chinese business community about how these reforms would be done. 

In addition, many of the UMNO top leadership - including former Prime Minister Tunku Abdul Rahman - had strong liberal tendencies from their British upbringing and early education. They would not condone the idea of "robbing Peter to pay Paul", raiding the interests of the Chinese community for the benefit of the Malays. 

The New Economic Plan was thus first presented to the Malaysian Parliament in July 1971. 

The NEP's Hairy Goals 

The NEP is a complicated, hairy thing. After all, it lasted twenty years. The government implementation evolved and adjusted as times changed. But the core goals stayed the same. So let us boil away the meat and try to get to the bones of the matter. 

As presented in 1971, the NEP had two major goals. The first was the eradication of poverty for all Malaysians regardless of race or ethnic group. This is pretty simple and easy to get behind. Sounds like something any politician would say in an election campaign. 

The second goal simply sought to restructure the entirety of Malaysian society. The government re-classified every Malaysian into roughly two groups. The first group are made up of the Malays and the ethnic indigenous people, dubbed the *bumiputra*. This literally means "sons of the soil". Everyone else would be the non-bumiputra. 

The basic idea of the second goal was to lift up the economic positions of the bumiputra (with special focus on the Malays) to bring them on par with the non-bumiputra. This would be achieved in two ways: Affirmative action in employment patterns, and the restructuring of corporate stock ownership. 

Up until that last point, nothing which an American audience might be unfamiliar with. Affirmative action as a concept, they can probably recall from school applications and the like. The calls for poverty reduction, very familiar too. But what is that thing about the corporate stock ownership?

What the NEP proposed to do was to have the state actively intervene into the economy and over time raise the share ownership from the aforementioned 2.4% to 30% by 1990. Chinese ownership would be allowed to rise from 34.4% to 40%. It is the foreign stock ownership that takes the largest hit, halving from 63.3% to 30%. 

This is pretty radical. Imagine if Joe Biden (or Trump, if that's how you roll) said that in order to abolish inequality between White and Black Americans, the government will intervene into the economy until share ownership by Black Americans matched that of their proportion in the US population (13% - White Americans are 70%). 

Implementing the NEP 

The Malaysian-Chinese community at the start of the NEP accepted its implementation for a few reasons. Not saying that they are super-thrilled and were dancing in the streets about it. But they grudgingly went along. First reason why: Like the rest of the Malaysian population, they wanted racial harmony - they wanted the race riots to end. 

Secondly, like I mentioned above, the Malaysian government explicitly ruled out a Communist-style redistribution. These share percentages would be achieved through growing the pie, not re-cutting it. Several senior politicians made this publicly clear. They spun it as a win-win. 

And thirdly, the NEP got off to a slow and measured start. It began with a broad declaration of ideas, without hard numbers behind it. After all, it kind of sounds ridiculous. How would you be able to literally redistribute all of Malaysia's stock shares from one race to another? No numbers mean no teeth. 

It is indeed a hard problem and the government tried a few schemes first without much success. These policies required local companies to issue and sell stock shares (10-30%) specifically for the bumiputera. They largely did not succeed as few companies participated as they were not required to. 

At this point the NEP seemed to be on shaky ground. A new generation of UMNO economic hardliners as well as members of the Malay private sector pushed the government to do more. And so in 1975, it came up with the Industrial Coordination Act (ICA). This would finally put real enforcement and teeth to the NEP's Second Goal. 

Passed into law after the resignation of ethnic Chinese Finance Minister Tan Siew Sin, the ICA required every business of a certain size applying for a manufacturing license to present to the government a written report of their activities - making evasion much harder. They were then required to divest 30% of their shares to the bumiputera and hire Malay employees such to match the Malays' proportion in the general population. 

These restrictions were later amended and softened as the Chinese minority strongly objected to them, but still eventually implemented. 

Shares acquired for the bumiputera were also no longer to be kept by trust organizations. These trust organizations had gotten extremely rich over 1971-1975 period, raising bumiputera share ownership from 4.3% to 9.2%. But the average person on the ground did not actually benefit since the shares were held "in trust" but not distributed. The new laws ameliorated this, forcing the trusts to sell the shares directly and exclusively to the bumiputera. 

Adjustment 

The ICA heralded hard times for the Chinese minority as the NEP not only meant wealth was taken away from them (even with the oil-fueled economy growing as fast as it was) but also a subordination of Chinese influence and culture in Malaysian society. 

The NEP was more than just an economic policy. It made Malay the main language of instruction and promoted Islamic values in schools. Chinese political participation was curbed. Tough times for everyone. 

Malay firms began emerging and competing against Chinese ones, especially in the industrial and construction fields. Some of this is fair competition, but others were not. Construction projects from the government for example were heavily slanted for Malays. Certain licenses like printing, logging and fishing were reserved exclusively for the Malays. 

With the 1975 ICA bringing things to a nadir, the UMNO revised the policy to loosen its requirements and lighten its burdens. Tax cuts were doled out to firms in compliance with NEP, adding a carrot to the stick. A few years later in 1984, further liberalization policies were carried out in response to a weak economic recession. 

Over time, these adjustments would loosen the Malay nationalist sentiment in the NEP. For example by 1985, foreigners can now once again own 80% of a Malaysian company's stock. If a Malaysian company exported over half of its goods abroad, then it did not need to reserve any shares for the bumiputra. These adjustments were well-received.

The Results 

By 1991, the government announced the end of the twenty year NEP. In taking stock of its results, we need to have a lot of nuance. As with everything. 

The NEP set out to rebalance economic wrongs - essentially buying peace between the races. It fell short of the 30% stock ownership goal by 1990, but share ownership rose from 2% to 20%. With the entire stock market having grown from 530 million ringgit in 1970 to 110 billion in 1990, bumiputra stock value exploded 22 times over. A new Malay middle class and entrepreneur class was able to emerge from this - in many ways, a success. 

And some Chinese got very rich. Chinese business leaders realized that the NEP could be an advantage for their businesses and struck joint ventures with Malay money - including UMNO political leaders. Tan Sri Robert Kuok Hock Nien, scion of the Shangri-La hotels empire amongst others, is one notable example. NEP helped make him vastly richer. 

The social stuff would be harder for the Chinese community to accept. First in minds would be the education initiatives. Malaysian-Chinese schools lost priority in funding and became overcrowded. Chinese were also increasingly locked out of tertiary education opportunities, dropping from 48% in 1970 to 26.5% in 1980 at the top three colleges. They got less scholarships for their education and studying abroad. 

For a Chinese community that emphasizes education, this was a serious problem. Many families would send their children overseas to study in the Anglosphere, Taiwan, or Japan. 

Working class and poor Chinese suffered the most. The NEP helped Malays get jobs in which they were traditionally under-represented, but did not do the equivalent for Chinese. Over a million Chinese lived under the poverty line in the 1980s, squatting in small villages. Their political participation and government employment opportunities were also greatly eroded. 

Chinese discontent would trigger a brain drain. Over 40,000 Malays emigrated to the US, Canada and New Zealand from 1983 to 1990. 150,000 Malaysians started working in nearby Singapore. Singapore especially would benefit from taking in these Malaysian-Chinese. Well, at least economically, but that's a story for another day. 

Conclusion 

If you might recall, I am extremely interested in historical events of economic redistribution and inequality reduction. In a previous video, I wrote about KMT Taiwan's land reform efforts, which radically remade the Taiwanese economic landscape and made way for future growth. 

I also wrote a bit about the Taiping Rebellion, which helped reduce economic inequality by killing everyone. It was not the society's intention when the war kicked off, but it happened nevertheless. 

Economic inequality has gotten a lot of press as one of the great issues in American society today. Many people on both political parties have presented their own solutions. I like studying previous situations in which governments tried to actually make it happen. 

For what it is worth, what I have learned is that economic reform and inequality reduction is a complicated, long-lived quest. Whenever it doesn't involve killing everyone, that is. Can America pull off such a thing?

---

Know someone who is interested in this? Send this to them!