FACTBOX: Malaysia's affirmative action policy

(Reuters) - The newly elected opposition took power in Malaysia's industrial heartland on Tuesday and immediately said it would scrap one of the nation's sacred cows -- the decades-old policy of affirmative action for ethnic Malays.

Here are some facts about the policy:

WHEN AND WHY WAS AFFIRMATIVE ACTION INTRODUCED?:

* Affirmative action in favor of majority ethnic Malays dates back to British colonial rule, before independence in 1957. It was accelerated in the form of the New Economic Policy (NEP) after race riots between Malays and ethnic Chinese in 1969.

* Malaysia's second post-independence prime minister, Abdul Razak, launched the NEP in 1971; after national soul-searching that blamed the wealth gap between Malay and Chinese communities for the violent riots of May 1969.

* The policy was reincarnated as the National Development Policy in 1991 but is still widely known as the NEP.

WHAT IS ITS GOAL, HOW DOES IT WORK?:

* It is aimed at eradicating poverty through redistribution of wealth in favor of ethnic Malays and indigenous people -- collectively known as Bumiputeras or "sons of the soil".

* Bumiputeras receive preferential discounts on house purchases, special allocations in public share issues and preferred status in the award of government contracts.

* University-entrance quotas for Malays have been abolished but some non-Malays complain that Malays have an easier path to university because matriculation is skewed in their favor.

* The NEP's specific target is for Bumiputeras to achieve 30 percent ownership of corporate equity, non-Malays to own 40 percent and foreign owners 30 percent by 2020.

DOES THE POLICY WORK?

* While Bumiputera wealth went from just over 2 percent in 1970 to about 19 percent in 2004, Malays, who make up more than half of the population of 26 million, are still the poorest racial group -- well behind the minority ethnic Chinese, who hold about 40 percent of the nation's wealth.

HOW IS IT SEEN DOMESTICALLY?:

* Many Malays say the plan has strayed from its original aim of fostering economic competition to enrich only a small elite, while many rural Malays live hand to mouth in wooden huts.

* Attacks on affirmative action are especially sensitive for the ruling United Malays National Organisation (UMNO) because government handouts to Malay businesses are its financial lifeblood. The party has strong ties to the building industry, which is fed on preferential state contracts.

AND INTERNATIONALLY?:

* Malaysia's favoring of domestic firms has seen it barred from supplying U.S. government agencies, and has been a key stumbling block in five rounds of talks between the United States and Malaysia on a free trade deal. Source: Reuters and Malaysia's Economic Planning Unit, part of the prime minister's department.

Source: Reuters

(Writing by Gillian Murdoch, Singapore Editorial Reference Unit; Editing by Sanjeev Miglani)