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FEER - Election review fwd
By web aNtu

4/12/1999 9:26 pm Sat

Subject: The Far East Review

Businessmen wanted a Mahathir victory, and got it. But
some worry that the loss of Malay support may lead the
government to put political revival before economics.
By S. Jayasankaran and Michael Vatikiotis in Kuala
Issue cover-dated December 9, 1999

Malaysia's November 29 election produced a convincing win for the
country's ruling National Front coalition. After all the hype and
hoopla about change, Prime Minister Mahathir Mohamad stayed firmly in
power. Yet the result was hardly a vindication of Mahathir's actions
during the political storms of the past 18 months. His victory was a
qualified one, and the results may portend important changes. Although
the National Front won 56% of the popular vote, its share of the total
was down 9 percentage points from the last election in 1995. And in a
radical departure from previous norms, large numbers of Malays, who
comprise 55% of the population, withheld their support from Mahathir's
United Malays National Organization, the dominant Front member. The
opposition Islamic party Pas registered major gains, prompting
consternation in business circles and among the country's Chinese and
Indian communities, which worry about rising Islamic sentiment. As the
dust settled, it was clear that non-Malay support for Umno's coalition
partners had done much to perpetuate Mahathir's 18-year rule.

Indeed, it was Umno that was hurt the most. It lost 20 parliamentary
seats and was routed in the northeastern states of Kelantan and
Terengganu. "There is a clear erosion of support among the Malays for
Umno and the Front," says former Deputy Premier Musa Hitam. "If this is
not addressed, it's dangerous for the future." Maybe. But for many
there are also concerns about another danger: That Umno, as the Front's
major party, may now be tempted to modify its policies--either in
Malay-nationalist or Islamic directions--to woo back Malay voters.

"As a professional, I'm worried about the drop in Malay votes for the
Front," says investment banker Low Ming Siong. "I'm not sure how Dr.
Mahathir can redress the issue." The day after the election, the Kuala
Lumpur stockmarket fell 1% on fears of an Islamic resurgence. These
fears also encompa#s the possible enhancement of a 30-year-old
affirmative-action policy that favours Malay participation in the
economy and is due to expire next year.

Outwardly, many foreign investors had been hoping to see Mahathir
returned with an unambiguous majority, in the hope that a strong result
would lay to rest the political uncertainty caused by the sacking and
jailing of former Deputy Prime Minister Anwar Ibrahim. But the
successful election of Wan Azizah Wan Ismail, Anwar's wife, and the
shift in popular sentiment among the Malays, the core of Umno's support,
suggests more vigorous politics in Malaysia is becoming a norm. Two
outspoken opposition figures, Lim Kit Siang and his deputy, Karpal
Singh, may have lost their seats, but the Anwar issue has not been

On another level, the elections signalled a shift of Umno's power
base--from the poorer, northern Malay heartland states to the south: The
prosperous, southern state of Johor was the only one that saw Umno and
Front candidates actually increase their winning margins. Similarly, the
Front's non-Malay component parties and those in Sabah and Sarawak more
than held their own, suggesting they could be poised to exert greater
influence on government policy.

The fallout from all this is that the country, over the medium term,
could be less easy to govern. Under the last two decades of Mahathir's
rule, Malaysia's federal system has become steadily more centralized.
The greater share of the government's vote that came from Sabah and
Sarawak could encourage those states to press for more resources.

Then, there's the fact that one of Malaysia's oil-rich states,
Terengganu, has fallen to Pas. The state earns 500 million-600 million
ringgit ($130 million-160 million) annually from oil royalties. Under an
agreement between national oil corporation Petronas and the three
oil-producing states, Terengganu, Sabah and Sarawak, the state
governments receive 5% of gross revenue. Pas is already talking about
increasing the royalty share, last adjusted in 1976.

The federal government, however, is saying it's business as usual.
Deputy Prime Minister Abdullah Badawi told the REVIEW: "Businessmen in
the private sector, both Malaysian and foreigners, should not be
expecting any changes to our pro-business policies." Abdullah also
dismissed suggestions that Umno might counter Pas with a greater
emphasis on the New Economic Policy, which economists say distorts the
competitive environment.

The NEP, which seeks to lift ethnic Malays to economic parity with the
richer Chinese, is up for renewal next year. Some analysts see the
policy as a drag on Malaysia's growth. Abdullah, possibly pointing the
way, says: "The NEP has already been fully implemented. Previously it
was about ethnic imbalances. Now there are other forms of imbalances,
sectoral for instance. The Malays have become more confident."

Faced with such issues both Umno and Mahathir will need to take a long,
hard look at the election outcome. Umno politicians who came close to
losing their seats voiced concern about the party's performance.
Abdullah concedes that the vote showed a desire for adjustments. "Umno
will be very responsive," he promises.

For Mahathir there may be other complications. He has pursued his vision
of a fully developed Malaysia single-mindedly, never concealing his
disdain for populist politics. But given the resentment in the Malay
community over the treatment of Anwar, he may now have become Umno's
problem. "One thing this result reflects is that there is deep-seated
resentment of this man among the Malays," says an adviser to a senior
Umno politician.

This sentiment probably should not become part of any immediate
succession calculus. Despite Pas's inroads into the Malay heartland, the
opposition coalition formed in the wake of Anwar's arrest failed to
attain critical ma#s. "The swing of Chinese votes did not come our way,"
concedes coalition spokesman Rustam Sani.

That gives the powerful non-Malay business community some leverage over
the government it voted for. But for Mahathir it must be a bitter pill:
The Malays he has championed for so long have drifted away from him.

After the Elections
Again the old question: Who will succeed Mahathir?
Issue cover-dated December 9, 1999

With elections over, Malaysians are returning to an old distraction,
trying to read the tea leaves on who Mahathir Mohamad finally will pick
as his successor. But for the foreign business community, this is no
idle game: Political question marks can mean policy uncertainties that
affect investments. Two days before polling, we caught up with Dr.
Mahathir as he spoke at a technical college on the edge of Anwar
Ibrahim's old constituency in Penang state. Confronted with that very
question, the prime minister hedged his reply: Deputy Premier Abdullah
Ahmad Badawi is of course prime minister-in-waiting--"unless, of course,
something happens to him." He added: "I don't like to say it's 100%
certain, because three of my 'anointed' successors have not become prime
ministers." Yet as we left the Permatang Pauh constituency, driving past
a parade of foreign-owned factories, it struck us that succession may
have little bearing on the thrust of future foreign-investment policies.
It won't immediately matter to foreign businesses whether, in Mr.
Abdullah, Dr. Mahathir will be fourth-time lucky, or someone else
succeeds him. Why? To begin, you can't help but detect a cultural
insecurity in Malaysia--why it so desperately wants to lose its
developing-nation tag. Certainly, this is the reason why everything new
in this country has to be world-beating, from the best motor-racing
track to the planet's tallest building to the most automated airport.
The funny thing is that none of these could have been built without
lashings of foreign help, down to the musicians in the well-regarded
Petronas Philharmonic Orchestra. Likewise, clawing up to
developed-economy status in the next 20 years will need foreign
a#sistance, this time in the form of direct investment.

No doubt Dr. Mahathir knows this, which explains why the government so
quickly sought to a#suage the fears of direct investors when currency
controls were established--as opposed to the tirade currency traders
faced. Indeed, in Dr. Mahathir's vision there would appear to be good
foreigners and bad ones. The good seek to profit from helping
Malaysians, the bad by impoverishing people. While it was Dr. Mahathir
who articulated these sentiments, they are generally shared by his
countrymen. The result is an understanding among
Malaysians--opposition-party supporters included--that friendly
foreigners who build factories and bring in expertise should be
encouraged. Hence, as a senior government official close to the action
told us, no prospective prime minister is likely to roll back
accommodations for foreign investors--and in fact more may be in the

Now all this is fine, but it raises a concern that there is little
imperative to liberalize in areas that don't immediately or apparently
affect direct investors--such as exchange controls. More, it's one thing
to encourage foreign investment--and we're all for it--but it's just as
important to make domestic investments more efficient. Yet, even as
Malaysians were discussing the elections, they also were whispering
about business deals that allegedly benefit high officials. Thus, even
as Kuala Lumpur appears committed to furthering FDI-friendly policies,
it may want to note that subsidiary issues such as allegations of
corruption and corporate and government transparency are as much a
concern to foreigners, since these affect the local companies with which
they must form relations.

So while many may still fret over who will succeed Dr. Mahathir, the
real concern seems to us whether that person can put to rest the
whispers--and outright accusations--of cronyism that have dogged this
premiership. Would anyone care to stand up and be counted