Malaysia's Development Challenges: Graduating from the Middle ed. by Hal Hill, Tham Siew Yean, and Ragayah Haji Mat Zin (review)

This book examines the policy challenges that Malaysia faces in its aim of moving from a middle-income to a high-income country. To analyse these challenges, Malaysia's Development Challenges presents thirteen essays written by a team of scholars, with some of the country's best economists at its core. These essays assess the three inter-related factors — microeconomic, macroeconomic, and distributional — that are crucial to the Malaysian graduation (from middle-income to high-income) challenge.

The underlying message of the book is that Malaysia has achieved consistent growth since its independence in 1957, with a relatively efficient bureaucracy and prudent macroeconomic management. The country's success is even more pronounced as it has moved away from a predominantly resource-based economy to an industrial and export-oriented economy. Nevertheless, Malaysia's phenomenal growth hides its more complex socioeconomic problems, especially the nation's improper management of the New Economic Policy (NEP), an affirmative action policy (favouring the majority bumiputera ethnic group in economic activities and other opportunities) conceptualized and enforced since 1970 to rectify severe economic disparity between the major ethnic groups. Although the NEP's original intentions of poverty eradication and economic restructuring to eliminate the identification of ethnicity with economic function are both laudable and politically pragmatic, it is never an easy task for policy-makers to juggle both the social obligations of the NEP and economic development. This situation is further complicated when the economy eventually develops and becomes more complex, and when there is a lack of impersonal and impartial institutions that could moderate the excesses of the NEP. In addition, the loosely defined concepts of the NEP are excellent avenues for less than honest politicians (especially from the ruling coalition) to manipulate policies, usually to benefit themselves and their cronies, as they see fit. As these ethnocentric policies engrain themselves in the psyche of Malaysians, any reforms, however rational or beneficial, would bring about great resistance, particularly from those who benefit the most from the current system (see Chapters 2 and 3). It is mainly because of such resistance that Malaysia is finding it difficult to embrace the necessary reforms so that it could make the quantum leap from the "middle-income trap" that its economy is stuck in. To put it simply, the book argues that any reforms would have to be conducted in a careful (but not necessarily piecemeal) manner, without upsetting the ethnic status quo embedded within the society. While the reforms exhorted by the book's various chapters are practical and thoughtful, the larger stumbling block preventing Malaysia's graduation is more political and social than economic, one which is much harder to resolve given the deeply rooted problems resulting from the haphazard implementation of the NEP.

Throughout the book, a balanced approach is evident as both quantitative and qualitative methodologies are utilized effectively by the authors. For instance, Chapter 9 argues that the electronics industry, the largest contributor to Malaysia's manufactured exports, has not upgraded and innovated rapidly enough to move beyond its relatively simple and low value-added activities into more sophisticated and higher value-added ones such as research and design. Such a thesis is supported by a masterful analysis of metrics representing the technological capabilities of electronic firms, and the country's broader research base. On the other hand, Chapter 7 stands out with its qualitative approach, documenting the key microeconomic reforms over the last few decades and identifying areas where further reform is needed. It illustrates that Malaysia's experience in privatizing some of its biggest state-owned companies to relieve the burden on the state and to enhance their efficiency has produced mixed results at best. The uneven record of these programmes can be attributed to predatory business practices (with the tacit encouragement of politicians), and more importantly, the regulatory weaknesses in mediating such excesses. To overcome these weaknesses, the...