(Adds link to PDF: r.reuters.com/cyn52s)
* Vote on Malaysia's prospects sees "brain drain"
* Malaysia sets very ambitious investment targets
* Affirmative action policy prompts talent exodus
* Policy reform needed, but will be political risk
By Bill Tarrant
PUTRAJAYA, Malaysia, July 7 Dr. Mahathir Mohamad
sits at a vast desk cluttered with work, hands clasped before
him and looking at his visitors with a slight smile.
Dr. M, as he is popularly known, was prime minister of
Malaysia from 1981 to 2003, the first commoner to ever hold the
post in a land with nine sultans. His demeanor suggests the
country physician he once was, ready with a frank diagnosis --
and in his first interview with the foreign media in five years,
he doles out prescriptions for what ails his nation.
The man who made Malaysia part of the "East Asia Miracle"
with a massive inflow of foreign direct investment doesn't think
much of it today. The former miracle economy, now a muddle,
needs a new policy direction, he says in his office in
Putrajaya, the administrative capital he built on old plantation
land in the 1990s.
"We should not be too dependent on FDI anymore," says
Mahathir. "We've come to the stage when locals can invest. They
have now the capital. They have the technology. They know the
market. And I think they can manage big industries."
His thinking is at odds with government policy. But it gets
to the heart of a debate over the future of Malaysia, a former
emerging market star now in danger of becoming an also-ran,
stuck in the dreaded "middle income trap."
Foreign investment has been dwindling since the onset of the
1997-1998 Asian financial crisis. Capital outflows have even
exceeded inflows in four of the past five years. This has been
accompanied by an alarming "brain drain" of emigres voting with
their feet against Malaysia's prospects.
Malaysia is counting on foreign investment to provide a
quarter of the investments needed to fund projects under its
"Economic Transformation Programme," which aims to turn the
country of 28 million into a fully developed nation by 2020.
That comes to an average of more than $11 billion a year,
compared with an average of $3.1 billion since 1997 -- by any
measure an ambitious target.
The challenge is vastly more complicated by the exodus of
talent that hits directly at Malaysia's aspiration to become a
high-income nation focused on knowledge-based industries.
"For Malaysia to stand success in its journey to high
income, it will need to develop, attract and retain talent," the
World Bank said in a March report. "Brain drain does not appear
to square with this objective: Malaysia needs talent, but talent
seems to be leaving."
The rise of China and India in the region has overshadowed
the export-dependent "Tiger Cub" economies of Southeast Asia,
all struggling with their own reforms. Thailand has been at a
dangerous political impasse for six years. Indonesia is
consistently ranked as among the world's most corrupt countries.
The Philippines is battling long-running insurgencies.
Yet Malaysia does not compare well with its peers in the
eyes of investors. A March report by Bank of America Merrill
Lynch ranked Malaysia the second least popular market after
Colombia among global emerging market fund managers and tied
with India for least favourite among Asia-Pacific managers.
A chief difficulty is the nation's balky affirmative action
Ethnic Chinese account for most of the brain drain. The
reason 60 percent of them gave for why they moved out of the
motherland was "social injustice", a World Bank survey says.
They are referring to the "Bumiputra" (sons of the soil)
policy that discriminates against Chinese and Indians, who
account for a third of the population, in favour of majority
Malays for all kinds of things -- places in universities, jobs,
shares in companies, home mortgages, government contracts.
The government acknowledges the policy has been widely
abused, with Malay front men offering their names to Chinese
businesses to obtain government contracts, an arrangement known
as "Ali Baba", after the character in Arabian Nights who gains
entrance to the treasure cave of the 40 thieves with the magic
words "Open Sesame".
Prime Minister Najib Razak has launched a new edition of
the policy called the New Economic Model that is meant to
correct the inequities, mainly by making preferences need-based
and not race-based. But as the World Bank report noted, "limited
headway has been made on this front."
It is certainly not popular with the rank and file Malays in
Najib's UMNO party.
Making significant reforms to the system is crucial to
Malaysia's aspirations, but any rollback of privileges for the
majority is a big political risk for any government that tries
It is the Malaysian dilemma.
THE IMPOSSIBLE GAME
Idris Jala, the minister in charge of greatly boosting
investment and wooing back emigres under the Economic
Transformation Programme (ETP), calls it the impossible game.
He is an unlikely character in the Malaysian Cabinet, a
Christian from the Kelabit tribe in Sarawak on Malaysian Borneo
who spent most of his career running companies, including
the Malaysian unit of Royal Dutch Shell RSDs.L and Malaysia
"I am a true believer that real transformation goes hand in
hand with the game of the impossible," Idris says in an e-mail
interview. He sets impossible targets, is "very directive" and
pushes his team constantly "to do the right things, but
differently" until they are finally "one step ahead of you".
"When you do transformation, you cannot achieve big results
by democracy," he notes.
The ETP aims to attract 1.4 trillion ringgit ($466 billion)
by 2020 in a dozen broad industries. Only 8 percent of that will
come from the government, which has long dominated the economy,
either directly or through government-linked firms. Idris
disclosed to Reuters that foreign investment will account for 27
percent of the total.
He wants to climb the value ladder in the targeted
Take birds' nests, for example. Nests made with the saliva
of swifts have been collected for centuries from huge limestone
caves in Idris' home state of Sarawak to make the most expensive
soup on earth. Processing them would give Malaysia a bigger
chunk of a global market worth $3.3 billion, he said.
Foreign investment will also provide many of the 3.3 million
jobs that will be created under the ETP, whose over-arching goal
is to raise per capita income to $15,000 from $6,700 in 2009.
A challenge will be to upgrade skills in a labour force long
geared to basic manufacturing and plantations, attract foreign
talent, and try to reverse some of the "brain drain." About
700,000 Malaysians work abroad.
A new agency called "Talent Corporation" has been given this
task, offering tax breaks for Malaysians to return home and
easing visa restrictions for foreigners.
But the shift from low-cost manufacturing and plantations to
more knowledge intensive work needs to take place in an
environment where creativity and freedom of inquiry can flourish
to draw talent and investment. The Malaysian model of ethnic
preferences has not been conducive to that.
Mahathir remains a towering figure. In public forums and in
his blog, he is a scourge to the government of the day,
influential, for instance, in forcing the early retirement of
his anointed successor, Abdullah Badawi. But while he's a critic
of his successors, he is a strong defender of the Malaysian
system he built.
Mahathir came to office as the foremost champion of Malay
privileges. Under his administration, the "Bumiputra rules" led
to a mingling of politics and business that largely benefited a
coterie of Malay and Chinese businessmen.
Huge government building projects kept the contracts flowing