Niaz Asadullah and Andrew Kam Jia Yi provide an overview of the formidable challenges facing Malaysia's new government

By Niaz Asadullah and Andrew Kam Jia Yi

In 2007, on the 50th anniversary of Malaysia’s independence, Nobel laureate economist Joseph E. Stiglitz celebrated the “miracle” of the country’s economic rise and creation of a vibrant multiethnic society. In the 15 years that followed, however, revelations of large-scale corruption and abuse of foreign workers damaged Malaysia’s international reputation and fueled domestic political instability.

But Malaysia’s fortunes may be turning around. Late last year, long-time opposition leader Anwar Ibrahim was sworn in as the country’s new prime minister. His record of effective and corruption-free leadership offers good reason to hope that Malaysia can return to a stable development path leading to greater prosperity for more people.

As deputy prime minister and finance minister in the 1990s, Anwar oversaw the double-digit GDP growth that drove Malaysia’s rise as one of Southeast Asia’s “Tiger Cub” economies. When the Asian financial crisis erupted, he played a central role in mitigating the contagion. And he managed all of this without a whiff of malfeasance.

Anwar’s record stands in stark contrast to that of Najib Razak, another finance minister who went on to lead the cabinet. Under Najib’s government, Malaysia became embroiled in a multibillion-dollar corruption scandal at the state fund 1MDB, with much of the plundered funds having ended up in his own bank accounts. He is now serving a 12-year prison sentence for corruption.

To be sure, Anwar was jailed for nearly a decade himself. The difference is that the charges against him were concocted to remove him from the political picture, after his relationship with Mahathir Mohamad – the prime minister when Anwar held the finance portfolio – broke down.

The question now is whether the 75-year-old Anwar can bring to bear the policy savvy he has previously shown in addressing the challenges Malaysia faces today, not least sustaining the post-pandemic recovery at a time of elevated inflation and declining foreign direct investment. This will require, for starters, urgent action to strengthen Malaysia’s fiscal position, including narrowing the budget deficit and reducing the debt burden.

To this end, social spending must be reformed. Malaysia needs a stronger safety net, but funding it will require the government to reduce fiscal leakage by rationalising subsidies and ensuring that resources and services are well targeted. The ethnocentric handouts that have historically dominated Malaysia’s social budget must be replaced by need-based programs.

Increased private investment will also be essential. Mending Malaysia’s tarnished international image will help to restore the country’s status as a competitive destination for high-value investments. Any incentives for private investment (foreign or otherwise) must therefore be accompanied by rules ensuring higher labour standards and business practices that comply with international norms. It is assumed that future inward FDI will adhere to the principles enshrined in the National Investment Aspirations framework that was adopted in April 2021.

Beyond attracting more foreign investment, Anwar’s government must nurture the investment capacity of Malaysian-owned companies. Malaysia’s entire economy would benefit from enhanced efforts to transform indigenous firms into high-value-added global industrial champions. But upgrading local industries cannot be done in a vacuum. Cultivating partnerships with foreign investors that can provide access to frontier knowledge, technology, and capital is also crucial.

When it comes to trade, Malaysia will maintain its export-oriented regime, while pursuing pro-market reforms, such as streamlining non-tariff measures and domestic regulatory barriers, in an effort to improve transparency and eliminate cartels. Malaysia’s government might also consider eliminating the “approved permits” licensing system for agricultural imports – a step that would help bring down food prices.

Equally important, Anwar’s government must break the “iron triangle” of bureaucrats, politicians, and manpower-industry interests that contributes to abuse, exploitation, and shortages in Malaysia’s migrant labour market. The country’s export sector is already suffering from an acute labour shortage. Until Malaysia secures a steady supply of workers whose rights are protected, local businesses cannot grow, and foreign investors will not return.

The good news is that Anwar’s ten-point election manifesto acknowledges some – though not all – of these priorities. But campaign promises often go unfulfilled, overwhelmed by the hurly-burly of politics. Overcoming the ills afflicting Malaysia’s economy will depend in large part on Anwar’s ability to maintain a strong and stable government – no easy feat, when the unity government comprises members of five political coalitions.

Anwar has passed his first political test, winning a parliamentary motion of confidence in his government. But, to sustain his administration’s unity, he must carefully balance the interests of winners and losers. For now, it is reassuring that Anwar has reiterated his commitment to his election manifesto, a move that signals a positive shift in Malaysia’s political culture.

The next step will be to expand and refine that manifesto. This will require regular dialogue with civil society, including representatives of various ethnic groups. The inclusion of political parties from the East Malay states of Sabah and Sarawak in the new government represents a historic opportunity to address regional disparities.

The challenges Malaysia faces are undoubtedly formidable. But perhaps no one is better equipped to confront them than Anwar, who has also assumed the role of finance minister. A new era of sustained growth and shared prosperity may soon dawn in Malaysia.

M. Niaz Asadullah, Professor of Development Economics at Monash University Malaysia, is Head of the Southeast Asia cluster of the Global Labor Organisation. Andrew Kam Jia Yi is a professor at the Institute of Malaysian and International Studies at the University Kebangsaan Malaysia.. This content is © Project Syndicate, 2023, and is here with permission.