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FEER - Election review fwd By web aNtu 4/12/1999 9:26 pm Sat

Subject: The Far East Review MALAYSIA WAKE-UP CALL 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 Lumpur 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 buried. 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. EDITORIALS 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 cards. 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