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Troops of the Malay Royal Regiment patrol damaged and littered streets of the Chinatown area in Kuala Lumpur following days of racial rioting between Chinese and Malay mobs that left 100 people dead, May 17, 1969Getty Images
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Affirmative Action at 50 in Malaysia

A brief history and evaluation of the NEP, the never-ending policy

by
James Chin
May 26, 2021
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Troops of the Malay Royal Regiment patrol damaged and littered streets of the Chinatown area in Kuala Lumpur following days of racial rioting between Chinese and Malay mobs that left 100 people dead, May 17, 1969Getty Images

This year marks the 50th anniversary of the most important public policy ever implemented in Malaysia, the New Economic Policy (NEP). In American terms, the closest analogy I can think of is the Voting Rights Act that ended the mass disenfranchisement of African Americans in the South. The NEP—which was presented as affirmative action for the country’s Malay Muslim majority—has altered the political landscape forever. For Malaysians, unfortunately, it has also poisoned ethnic and personal relations in a way that now defines the country’s polity and economy.

Malaysia is a small peninsular nation in Southeast Asia with a population of 33 million, located south of Thailand and north of Indonesia. About 60% of the population are Malays and Muslims. The bulk of the non-Malays are Chinese (about 25% of the population) and Indians (about 7%).

With its ethnically and religiously mixed population, Malaysia remained a British colony until it negotiated its independence in 1957 and became the Federation of Malaysia in 1963. In 1969, widespread ethnic riots broke out after a disputed election, and thousands died. The country was put under emergency rule and parliament was suspended. In 1971 parliament was restored, and the government decided that the cause of the riots was the yawning economic disparity between Malays and non-Malays. The Malay share of corporate wealth then was estimated to be 2.4%, and the Chinese 34%, with the remainder said to rest in foreign hands. The professions were also dominated by non-Malays, while Malays mostly ran the civil service and the security services.

This racial divide in Malaysia’s economy and society was a real and largely deliberate artifact of British colonial rule, which imported both Chinese and Indians to help run the economy under the theory that they would be easier for the British to control. After Malaysia became independent, many Chinese and Indians stayed, using their existing skill sets, prior advantages, and personal and family connections to become dominant in many nongovernment sectors.

To remedy this situation, the government promulgated the NEP in 1971. The NEP had two main aims: to eradicate poverty regardless of race, and to “restructure society” so that all ethnic groups would be represented in every profession and throughout the economy. Initially the policy had wide public support, as the political establishment realized that political stability depended on all ethnic groups having a stake in the economy. The Malay community was legally given a 30% minimum share across all economic and social spheres, with quotas imposed to ensure that it was represented in all professions. Many government procurements and licenses were reserved for Malay businesses. The establishment recognized that the situation of the Malay community was very much a legacy of colonialism, and that an affirmative action program like the NEP could “correct” a historical inequality.

The NEP went from being a redistributionist tool intended to correct a specific set of historical wrongs to becoming a monster with a life of its own.

Yet within a short time, the NEP program went from being a redistributionist tool intended to correct a specific set of historical wrongs to becoming a monster with a life of its own. As the 1970s wore on, the feeling rose among the Malay establishment that the country’s multiracial experiment was not working for them; instead, they wanted to reconstitute Malaysia as a Malay state. As the NEP set aside billions to promote the Malay community via direct subsidies, the country’s Malay elite quickly found that almost anything could be justified in the name of “Malay rights” and “the Malay Agenda.”

Suddenly, all sorts of programs not related to the original NEP began to appear. Housing developers began to offer a discount to Malay property buyers. Banks were told they had to loan a certain percentage to Malay businesses, and that certain government contracts could only be awarded to Malay businesses. The most generous overseas scholarships were reserved for Malay students, and the government poured billions into building a special university that would only take Malays and other indigenous students. This university is currently the largest in the country, with branch campuses in each of Malaysia’s 13 states.

The new ethnic basis of the Malaysian economy and society in turn gave rise to an official national narrative in which the Malays were the indigenous people of Malaysia and thus entitled to certain benefits, while the Chinese and Indians were unofficially “pendatang,” or “newcomers.” In plain English, the Malaysian house was to be owned by Malays, while Chinese and Indians were to be seen as guests who had to follow the owner’s rules.

This all-encompassing ideology became widely known as “Ketuanan Melayu,” meaning Malay Supremacy. In administrative terms, the government labeled Malays and other indigenous tribes as “bumiputera,” a Sanskrit term meaning “sons of the soil,” and all others “non-bumiputera.” This sent a powerful signal to the country that more than half the population was effectively “chosen,” while the rest were considered to have less than full citizenship. All government programs were henceforth designed to help and enhance the bumiputera and thus lent legitimacy to Malaysia’s new form of institutional racism. The words “for bumiputera only” became standard in advertisements and media. In Malaysia, this was all considered to be normal.

You’d think that the Malay population would have been very pleased that the government was now officially behind them 110%, pushing them swiftly up the economic ladder, helping them dominate all professions, and putting the Malay middle class on track to hold the largest share of the country’s wealth, which it now does. This ongoing transfer of wealth from non-Malays to Malays over the past 50 years received an added boost when select Malays were given opportunities to own large corporations via the privatization of state assets in the 1980s and 1990s, in tandem with the worldwide neoliberal push to impose private sector discipline on previously state-run enterprises. Overnight, several hundred Malay millionaires and even the odd Malay tycoon came into being by riding the government privatization gravy train. Yet the overwhelming tone of public discourse throughout this period was of Malay resentment.

A close inspection suggests that a different kind of top-down politics was running in parallel to Malaysia’s great social engineering program. Until the mid-2000s, large companies that wanted to list on the Malaysian stock exchange were legally required to set aside 30% of their shareholdings for government-approved Malay buyers. Combined with the system of exclusive Malay-only permits, licenses, and easy loans, several Malay businessmen took the easy route to “success.” Many of the Malay businessmen who were given preferential shares, permits, and licenses promptly sold them to non-Malays for instant profits, defeating the purpose of helping the Malays gain a permanent foothold in the economy by developing their own ventures and skills.

Worse was to come. The Malay “businessmen” who profited hugely from the NEP soon became wholly dependent on government contracts and patronage, to which they now felt entitled. Their business model was simply the continuation of the “Malay Agenda”: the constant stoking of popular Malay fears about non-Malay economic dominance, which served to advance the Malay elite’s claims that government must underwrite their fair economic share through state intervention.

Those non-Malay businessmen who wanted government contracts relied on the “Ali Baba” business model, which required a joint venture. But the venture was joint only on paper, where the Malay “Ali” was the majority owner of a company that was in fact run day-to-day by the non-Malay (usually Chinese) “Baba.” These “Malay companies” would then bid for and typically win lucrative contracts from government procurement programs that were earmarked “for bumiputra only.”

In theory, the government’s Malay Agenda was triumphant in creating a large Malay share of the national economy; in practice, most of the “Alis” didn’t know how to run the businesses they were putatively leading. What they did understand was how to lobby the government on the importance of maintaining its affirmative action programs in perpetuity.

One important and intentional side effect of Malaysia’s rent-seeking economy has been the use of the NEP to enrich the dominant political party, the United Malays National Organization (UMNO). Like all ruling parties, the UMNO is constantly on the lookout for money to maintain its machinery. It would not be wrong to suggest that the UMNO needs the businessmen as much as the businessmen need the UMNO. It is a transactional relationship with simple and clear rules: The UMNO expects the Malay businessmen it helps via the NEP to donate to the party, especially during elections. It has become, in the lexicon of business schools, a win-win situation for the political patron and the business client.

This rent-seeking ecosystem is self-sustaining. The NEP gives the UMNO unlimited opportunities to “uplift” Malays, which expand the party’s power via funds from those opportunities, which it then lavishes on the special class of businessmen who owe their success to the ruling party and its racial theories.

The costs of this system go well beyond heavy undeclared taxes that benefit a small coterie of do-nothing businessmen and spread resentment and distrust across all levels of society. The awarding of all NEP benefits, from student scholarships to business opportunities, to self-defined bumiputera creates a high degree of bitterness among the non-Malay minority from a young age. A non-Malay finishing high school knows instinctively that his chances of entering public institutions of higher education are worse than his Malay classmate’s. The quota system, even if its impact is not officially stated, ensures that the Malay student will have an upper hand—always. The same goes for scholarships. It doesn’t even matter if a Malay student’s parents are millionaires—he or she is still likely to get the scholarship and university admission earmarked for bumiputera.

Unsurprisingly, the institutionalization of discrimination against non-Malays in every aspect of Malaysian life has led to a notable brain drain among non-Malays, who often refer to themselves as “nons.” For many Malaysians of Chinese and Indian origin, the best possible solution to the problem of racist affirmative action policies is to move to another country, where they will face less ethnic discrimination and where meritocracy is at least more highly regarded. Since the introduction of the NEP, it is estimated that more than 2 million Malaysians, at least 90% of whom are non-Malays, have left Malaysia. Many have moved south to Singapore—a city-state on the Malaysian peninsula run by a Western-facing Chinese majority. A standard joke in Singapore is that it was built by Malaysian Chinese and Indians to show their former country what it lost by pursuing a race-based society.

Malaysia’s ongoing brain drain is significant for a country where the labor force currently is only 16 million, not to mention that those who manage to migrate are usually the most educated and talented. Many of the countries that accept Malaysian Indians and Chinese migrants—such as Australia, Canada, and New Zealand—have a “points system” that takes in only those with work experience, tertiary education, and some capital.

A standard joke in Singapore is that it was built by Malaysian Chinese and Indians to show their former country what it lost by pursuing a race-based society.

What lessons can we glean from 50 years of the NEP in Malaysia? 

First, affirmative action policies designed to benefit members of a single race really creates two classes of beneficiaries. The first class is the intended recipients—the disadvantaged members of the target group. The second class is members of the same racial group who are not disadvantaged, but who nevertheless receive new and expanded opportunities. More often than not, the second class—which already had capital, knowledge, and connections—is able to take advantage of the program by steering the benefits to itself.

In Malaysia, what happened next was not an accident, but a product of the system’s design: Relatively quickly, the “successful” members of the previously disadvantaged class became rent-seekers—a powerful lobby for continually adding new redistribution schemes and carve outs. While all this was done in the name of justice, ethnic solidarity, and righting past wrongs (and in some cases, of racial supremacy), in almost all cases the new programs became vehicles for easy money, which in turn augmented the rent-seeking lobby and its political benefactors.

Second, an affirmative action policy based on a single racial criterion inevitably creates tension with other ethnic groups, some of which may have millions of equally poor or otherwise disadvantaged members but cannot access government assistance. These groups may even come to be seen as unjustly advantaged or exploitative by virtue of belonging to racial categories that the state does not regard as disadvantaged. This kind of policy naturally breeds racial resentments. Over time, the political climate becomes racially polarized and logical discussion can no longer take place.

Given the profound social, technological, and economic changes in the past 50 years, there is general agreement among the Malaysian elite that NEP reform is inevitable. But there is no consensus on how to change the program’s core: the provision of state benefits based on racial criterion. Those who argue for reform say the new Malay rich and middle class should be excluded from NEP benefits they no longer need, and that more targeted help should be directed to poor Malays.

The overwhelming consensus among the non-Malay political establishment is that NEP has outlived its usefulness, that a new policy should be adopted (rather than simply modifying the NEP), and that the most important guiding principle for the new policy must be needs-based benefits. In other words, an affirmative action policy that is colorblind. The non-Malay establishment argues that even with a colorblind policy, Malays would still benefit the most, as they are the largest group among the country’s disadvantaged. They believe that by adopting colorblind economic policy, Malaysia can finally work toward reconciliation between Malays and non-Malays, to the greater advantage of Malaysian society and economic development.

I believe that the position taken by the non-Malays is naïve and unrealistic for the simple reason that the Malay establishment’s very survival depends on rent-seeking from the NEP. The same is true for the Malay middle class, which sees the NEP as a means to pass the same favorable system they enjoyed onto their children. They do not want their children to have to compete—and why should they? In any case, after half a century of NEP, it has become impossible to hold a rational discussion on this topic. Younger Malays born into the NEP era see it as their birthright; for them, the prospect of its reform is not even an afterthought. They see their privileged position as a normal part of life.

For an example of another country that is repeating Malaysia’s mistake, look no further than South Africa. When the African National Congress (AFC) took power, one of the first things it did was conduct a “study tour” of Malaysia. Shortly after that, the Black Economic Empowerment (BEE) policy, mirroring the NEP, was adopted. The same abuse and rent-seeking were then repeated in South Africa. Like in Malaysia, no senior ANC politician dares to question the BEE. Like in Malaysia, the BEE has only grown and expanded.

There are no easy answers to the problems caused by affirmative action policies based on race, but the South African government should clearly take two steps to avoid the Malaysian path: The first is to narrow the size of the beneficiary class (“a majority of the country” is a national death sentence). The second is to set an end date in stone. These steps will not stop rent-seeking behavior, but they may limit its excesses. Once politicians get control of the program, it will become a Never-Ending Policy.

James Chin is Professor of Asian Studies and inaugural Director of the Asia Institute at the University of Tasmania.

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