1. INTRODUCTION
 
Post-war development in Malaysia, by any standard,
has been a success story. Development, however, took
a new and difficult turn in 1970 when, for the first
time, explicit interest and concern with equity and
racial economic imbalances were incorporated into
development planning. The Second Malaysia Plan, 1971
- 1975 (SMP) incorporated the New Economic Policy
(NEP), with its poverty and restructuring targets.
Subsequently, the Mid-Term Review of the SMP
elaborated on the NEP and appeared as the 20 year
Outline Perspective Plan, 1971 - 1990 (OPP). There
has been a great deal of discussion and debate on
what should replace the present New Economic Policy
when it comes to an end in 1990. Formulated in 1971
following the May 1969 racial riots, the NEP
enshrines the hopes and aspirations of the nation
for national unity. The over-riding objective of
development is to be achieved through the
two-pronged NEP objectives of eradicating poverty
irrespective of race and restructuring of society to
correct the identification of race with economic
function. These are very bold and ambitious
objectives. And they are made to appear even more
bold when there are specific quantitative targets on
reducing the incidence of poverty to about 17 per
cent; producing an employment pattern that reflects
the racial composition of the population at all
levels; and with at least 30 per cent of ownership
and control of wealth in the hands of the
Bumiputeras. All these are to be achieved within two
decades, i.e., by 1 990.
 
 
With the approach of 1990, the tempo and keeness of
interest have increased and there is no shortage of
suggestions as to what should supercede the present
NEP after 1990. A new social contract is about to be
made. The issue is being actively debated in the
current sessions of the National Economic
Consultative Council (NECC), as well as in other
parallel forums. Various positions are being taken,
politically motivated or otherwise, by different
groups on the question of the continuation or
termination and/or replacement of the 1970 NEP.
While the political posturing and interest
articulation cannot be avoided, there is no question
that a national concensus has to emerge on the shape
of the post-1990 economic policy out of the various
forums and debates if we are to chart a smoother
course to nation-building.
 
The purpose of this paper is to present a review of
the NEP and to suggest an alternative and new policy
to replace the present NEP when it expires in 1990.
It will present the main outline of MlER's Income
Doubling and Distribution Plan, 1991 - 2000 (IDDP),
as the proposed framework for the post-1990 economic
policy, incorporating the objectives of development
over the decade of the 1990's and the strategies and
policies to achieve the objectives of the IDDP. The
outline of the IDDP framework will hopefully
generate a critical debate over the various basic
issues involved in the post-1990 policy. In Section
2 the record of NEP in terms of macroeconomic
performance and restructuring up to the end of the
1980's will be reviewed. Some of the lessons that
have been learned from the implementation of the NEP
over the past two decades will then be summarised in
Section 3. In Section 4 the global economic
conditions and trends will be presented as a
background to the IDDP. The outline of the IDDP is
taken up in Section 5. A concluding section, Section
6, summarises the salient points of this overview
paper on the post-1990 economic policy.
 
 
2. GROWTH AND DISTRIBUTION UNDER THE NEP, 1970- 1990
 
 
2.1 Macroeconomic Performance under the NEP, 1970 -
90
 
What has been Malaysia's economic performance when
compared with other countries during the last two
decades? This question has been raised as an
important issue in view of the fact that Malaysia
had fallen behind other faster growing economies in
the Asian region over the last three decades in
spite of being just behind Japan at the beginning.
In reviewing macroeconomic performance under the
NEP, a number of critics of the policy had suggested
that the implementation of the NEP was the reason
for this, and posed the counter-factual argument
that Malaysia could have performed better if it had
abandoned the restructuring goals of the NEP much
earlier.
 
On the question of economic growth during the NEP
period, it might be useful to compare the growth
rate of the Malaysian economy with the world economy
as a whole, with the developed countries and the
newly - industrialised countries (Korea, Taiwan,
Singapore and Hong Kong) and our neighbour Thailand.
Figure 1 and 2 (and Table 1) show that Malaysia was
able to achieve a growth rate during the period that
is much more rapid than the world economy as a whole
and other developed countries such as the United
States, Japan and Europe. However, the figure also
shows that the Malaysian economic growth is
dependent on the economic fluctuations of the
developed countries; moreover, the instability is
much more apparent than those experienced by the
developed countries. The underlying factor for such
a pattern rests on the structure of the national
economy that depended on commodity exports, which
tend to generate economic instability, coupled with
the narrowly-based export-oriented industrial
sector. Comparing the national economy in the other
NlCs, including Thailand, Malaysia indeed
experienced a lower economic growth rate throughout
the period in question. The explanation for this
differential performance has to do with some
generaliseable as well as unique factors affecting
the Malaysian economy.
 
Thus, a possible answer to the first issue relates
to the resource-rich nature of the Malaysian economy
in comparison with Japan and the four Asian
"dragons" (namely, South Korea, Taiwan, Hong Kong
and Singapore), which produced an industrial "blind
spot" amongst policy-makers and thus delaying the
adoption of industrialisation as a strategy of
national development beyond the easy-phase import
substitution of the sixties. In the seventies, the
discovery of oil and the explosion of oil prices
generated the phenomenon of the "Dutch disease",
when oil producing countries such as Malaysia sought
to extract the maximum rent from the exploitation of
oil resources and spending the receipts on
consumption and non-directly productive assets to
the relative exclusion of investment of the surplus
in industries, thus delaying further the country's
industrialisation drive. When the choice was finally
made to actively promote industrialisation in the
early eighties, the world economy was unfortunately
entering a new recession as a result of the second
"oil shock." On the second issue whether Malaysia's
economic growth over the two decades would have been
better without the implementation of the NEP, the
counter argument is that this is the price we are
willing to pay in order to achieve better
distribution of wealth and incomes, and political
stability.
 
Did the implementation of the New Economic Policy
affect the economic growth and performance in the
seventies and eighties?  Official statistics
indicate that for the past 18 years the economy grew
at an average rate of 6.49 per cent per year.
However, the GDP growth rate had declined from an
annual average of 7 - 8 per cent in the seventies to
4.5 per cent in the eighties (and even declined
further to 1.0 per cent in 1985). This drop in
national economic growth rate in the early eighties
is accountable by the slowdown in the world economy
through the decline in both demand and prices of the
country's commodity exports.  The question is
whether steps were taken to minimise the impact of
the world economic slowdown on the national economy
especially in terms of economic management; that is,
was the government able to stabilise the economy
during the lagging period of the eighties and what
were the effects of these steps.
 
Available data on sources of economic growth in the
seventies and eighties is sufficient for us to
assess the main components of national economic
performance during the implementation period of the
NEP. For almost 20 years, government expenditure has
been the important driving force behind national
economic performance, and based on the information
from EPU, government spending contributed almost 28
per cent to the GDP growth in this period (Table 2
and Figure 3).  What needed to be discussed further
is whether this development expenditure was affected
by the high current expenditure in the seventies,
when the role of government in implementing the NEP
first took off, and by government investment in
major HICOM projects, for example, in the eighties.
Figure 4 (and Table 2) shows the contribution to the
growth of GDP between 1972 - 88 by types of demand:
it is obvious that both the public and private
sector had complemented each other in economic
growth. It is also obvious that the role of public
investment in economic recovery for the periods of
1975 - 76 and 1980 - 84 (when growth of public
investment was high in comparison with private
investment growth which was stagnant) was different
from the level of present economic recovery for the
period of 1986 - 88 where external demand and
private investment (and domestic demand) played a
more important role. This switching of roles has to
do with the adoption of structural adjustment
policies (including, among other things, the
relaxation of the foreign and domestic investment
codes, as well as austerity measures) by the
government to achieve economic recovery from the
recession of 1985.
 
The second important source of growth during the
first NEP period was contributed by the increase in
commodity prices in the seventies (in contrast to
the effect of the collapse of commodity prices in
the mid eighties). The role of the commodity sector,
 
especially oil, is very important as the source of
government revenues and expenditure in the
seventies. On the other hand, the increase in the
contribution of manufacturing exports and output and
as reflected in net external demand was more
apparent after 1980 until the recession of 1985 (see
Figure 4). The contribution from net external demand
had reversed in the recovery phase from 1986,
providing the major impetus to growth along with
domestic private consumption. However, the question
that has to be raised is whether such a contribution
is due to the effective depreciation of the ringgit
and/or the retention of value added in the country.
Since a stronger basis for growth in the years after
1990 will be from industrial development, the proper
accounting of these sources of national economic
growth is needed especially to resolve the issue of
export orientation and restructuring of the national
economy in the post-1990 situation.
 
The relationship between the implementation of the
NEP and its effect on economic performance cannot be
ascertained from the available information as yet
because this requires separation of the contributing
factors comprising international factors, the effect
of economic management and policy, and government
investment, and also the role of private investment.
Nevertheless, in one area, namely the unemployment
problem, particularly amongst tertiary-level
graduates, has now become a major economic policy
issue for the nineties.  The measurement of such
unemployment is still not sufficient. Data on wage
structure and share of wages and salaries in value
added component of the national product should also
be given more emphasis because the percentage may
have been reduced, thus affecting income
distribution since the implementation of the NEP.
The distribution issue will be discussed further in
Section 2.2 below.
 
How far has the implementation of the NEP through
investment and government expenditure affected the
national economic performance To answer this
question, a more detailed analysis of data on the
relationship between private and public sector
investment is needed. Other than the need to analyse
the features of investment such as the incremental
capital-output ratio (ICOR) to identify the sources
of capital that have been effectively utilised, and
analysis of crowding-out or crowding-in effects is
also useful to ascertain whether government
expenditure and investment have resulted in blocking
out private sector investment or helped promote it.
This analysis will point to the possible direction
of the respective role of the private and public
sector in economic development after 1990. Such an
analysis should also identify the role of foreign
investment in national development.  Lastly, to
answer the above question, we have to examine the
contribution of the third factor (i.e., technology,
entrepreneurship, innovation and efficiency) towards
growth of national output.
 
According to the data from EPU, the ICOR, which
measures the efficiency in the utilisation of
capital, has increased from 3.65 in 1971 - 80 to
7.21 in 1981 - 85 and this is anticipated to drop to
4.76 in 1986 - 90. The high ratios, where a value of
3 is considered the average, is the result of a
combination of factors: the intensity of the capital
utilised, the need for economies of scale and other
similar factors. From Table 3, the ICOR for the
public sector is much higher than for private sector
investment: the data shows that the ratio for the
public sector has increased from an average 6.75 in
1971 - 81 to an average of 15.51 per year for 1981 -
85. It was particularly high during the 1982 - 86
period during the implementation of the heavy
industries strategy. On the contrary, the private
sector ICOR has increased from 2.27 to 3.87 over the
same period, excluding the anomalous years of 1975
and 1985 - 86. The ICOR for the industrial sectors,
namely manufacturing, construction, transport and
communication, electricity and water supply, all
have high ratios due to the capital-intensive nature
of these investments. The high ICORs and the rising
external debt due to this investment, particularly
in the public sector, is one of the major problems
associated with the implementation of the NEP in the
last two decades that differ markedly from the
experience in the newly industrialising countries.
 
One important factor of the high ICOR in the public
sector is the expenditure pattern of the
non-financial public enterprises (NFPEs) throughout
the NEP period, especially in the eighties. NFPEs in
Malaysia can be defined as the production entities
that are owned and/or controlled by public authority
who in turn markets the output. On the whole, NFPEs
have been used to serve a variety of socioeconomic
objectives including both of the NEP objectives to
eradicate poverty and restructure society. NFPEs
have also been used in the establishment of heavy
industries and others.  Public companies, which were
estimated to comprise about one third of the whole
national economic activities, have emerged in about
every economic sector and are said to have a unique
dynamic feature. It had been asserted that there is
a possibility that such companies have not only
contributed to the increased public debt, but
through its inefficiency and accumulated losses had
led to wastage of investment resources and increased
the government's fiscal burden.
 
On the question of whether there is a crowding-out
effect by public investment on private investment, a
preliminary study by MIER shows that generally there
is no such phenomena for the whole study period of
1970 - 88; neither when the period is divided
between seventies and eighties. However, there is
physical crowding-out in terms of production as a
result of government consumption. Also, when the
sources of financing are examined, there exist some
indication that in the seventies the sources of
private investment were saturated due to financing
of government investment through domestic
mobilisation. This, however, does not appear to be
the case in the early eighties because government
investment were financed through external sources. A
more definitive conclusion will be forthcoming when
a more detailed study is carried out later.
 
The information on contribution from the third
factor that was given by EPU (based on a World Bank
Study) showed a drop in the contribution of the
residual factor to national output from 28 per cent
in 1970 - 75 to 13.7 per cent in 1975 - 80 and again
to-21.1 per cent in 1980 - 83 (Table 5). MlER's
study, using a different basis of calculation, shows
that technological and efficiency factors contribute
between 17.6 per cent and 20.8 per cent (depending
on the assumption made on the contribution from
labour) for the whole NEP implementation period
(Table 6).  This percentage contribution of third
factor growth, a measure of efficiency, innovation,
technology and skills, can be compared with the
situation found in both developed countries and
Asian NlCs, where the third factor contributes more
than 60 per cent to the national growth of output.
This shows how much the problems of wastage,
inefficient management, and shortcomings in skill
and manpower, and, technological development, need
to be addressed in the future under the post-1990
economic policy.
 
What are the implications of international factors
on economic performance under the NEP? The planning
of the NEP and an evaluation of its economic
performance throughout the twenty years of its
implementation depended closely on developments in
the world economy. For example, high commodity
prices had provided the foundation for economic
growth and government expenditure in the seventies.
Orientation toward export in the manufacturing
sector is also a hybrid policy between the drive to
woo foreign investment and relocation of foreign
industries. Foreign capital Inflow was also
complemented by external borrowing in the eighties.
All of these enhanced the close links between
international factors and domestic economic growth.
The openness of the Malaysian economy, in terms of
trade as well as investment, meant that the economy
is always subject to the vicissitudes of world
economic instability.
 
Data for evaluating the role of international
factors. especially in growth and world economic
restructuring, are still being collated. These data
are important to trace the effects on economic
performance under the NEP and to strengthen the
foundation for the economic future of the nation
after 1990. The information necessary for such an
analysis includes the data on comparative advantage
of the plantation, agriculture and manufacturing
sectors, information on commercial trends, and
sources of investment, technology and finance.
 
New developments in the international economy need
to be monitored particularly those that have emerged
in the later period of the eighties. These include
the field of international trade such as the
US-Canada Free Trade Agreement, the establishment of
one European market in 1992, and the protectionist
threat due to the possible emergence of trading
blocs, and other developments in the Asia-Pacific
region such as in the field of investment and
industrial relocation from overseas; the field of
technology, where new products and processes would
restructure the comparative advantage among
producers; and developments in the international
financial system, especially the emergence of a
global capital market.
 
The re-emergence of foreign investment in the
economy through the relaxation of the restructuring
requirements under the NEP during the post-1985
recovery has caused some concern regarding the
achievement of the NEP targets. While foreign
investment has been considered important in
achieving the present recovery, suggestions have
been made to ensure greater selectivity of
industrial focus and diversification of sources, in
particular the need to differentiate among real
estate investment, manufacturing investment and
portfolio investment (stock). What should be
encouraged is real and productive investment.
Information on the role of new forms of investments
such as management contracts, licensing,
franchising, and joint ventures are also needed
especially in the services sector that is
anticipated to play an important role in our
economic future.
 
What are the weaknesses and potential of the
national economic structure? This matter needs to be
scrutinised not only because it gives a perspective
to the economic performance in the seventies and
eighties, but also will provide guidance for the
future. Weaknesses in the economic structure became
apparent after the recession in 1985: the narrow
industrial base; the dependence on commodities that
continues to be threatened by growing competition
from neighbouring countries; the problem of graduate
unemployment and the skills gap; the low indigenous
technological development and the problem of an over
sized public sector. Steps to adjust the economy
have been taken including cutting down the
government deficit, better management of the
external debt, tax reform, changes in the structure
of investment incentives and tariff protection;
currency management and financial reform; and
privatisation, etc. The effects and impacts of these
structural adjustment policies should be studied so
that the basis of economic restructuring could be
continued after 1990.
 
Apart from the unemployment problem that resulted
from the structural factors (refer discussion in
Section 6), and the problem of inflation (Table 7), 
information and studies that could be relied on,
suggest that the national economy has the potential
to develop further. To summarise the current
position, MlER's analysis on production potential
(that is estimated as the GDP trend between 1962 -
1988) and index of capacity utilisation (calculated
as the ratio between actual national product and
potential product) shows a sufficient improvement in
the years of the NEP implementation (Table 8 and
Figure 5), except in the post-1985 recovery when
actual output is still below its potential.  This
has been historically the trend reflecting the
negative impact of world recessions on the Malaysian
economy (Figure 6).
 
In per capita GDP terms, incomes had doubled twice
during the NEP years (Figure 7): the first from 1971
until about 1976; and the second between 1976 and
the middle of 1981, despite the below potential
national product in 1975 - 79 period. Problems arose
after 1981. The latest world economic slowdown and
problems in private investment and public spending
that were discussed above dragged the national
product to fall below potential, especially after
1984. Per capita income fell back from the M$5,000
mark in 1984 to the 1981 level due to the 1985
recession. Only after the structural adjustments and
economic recovery after 1986 did the economy rise
back to its potential level. The prognosis based on
current economic trends is that per capita income
will rise back to M$5,670 (US$2,100) by 1991. From
Figure 8, it is evident that Malaysia is favourably
placed in terms of per capita income in comparison
to the Asian NlCs and other ASEAN member countries
in the past, and most likely in the future. The
question left for us in formulating the economic
policy after 1990 is whether economic growth could
be improved further to double the income by 2000 and
therefore overcome the unemployment problem and
distribution problem without affecting price
stability. We now turn to a review of the
distribution problem in the 1970 NEP.
 
2.2 Distribution and the New Economic Policy,
1970-1989
 
Any assessment of the progress of the NEP is
constrained by the availability of statistics. The
available statistics are largely from official
sources and these will be used because they are,
despite well known limitations, broadly comparable.
Non-official statistics will be used, wherever
available, to supplement the official statistics.
This section will focus on the two major prongs of
the NEP i.e. poverty eradication and the
restructuring of society. Some assessment of the
objective of creating a Bumiputera Commercial and
Industrial Community (BCIC) and income inequality
will also be included. It is helpful to see the
objectives of the NEP as one of improving the size
distribution of household income i.e. narrowing
income inequality, especially inequality in income
between the Bumiputera and non-Bumiputera.
 
First, the record on alleviating poverty. As is
usual there are always differences in views as to
how poverty ought to be measured. There are two
conventional ways of measuring poverty, the
'absolute' and 'relative' poverty approaches.
Absolute poverty is measured by taking a poverty
line income and then estimating the proportion of
households, or individuals, below the poverty line
income. It is a head-count measure. Crucial to the
approach is what goes into the poverty line;
official sources include food and non-food items in
the average consumption pattern of the household,
with the food component determined by what is
considered to be the minimum daily calorific
requirements of an average household. In 1987 the
poverty line income was M$350 per month for a family
of 5.12 in Peninsular Malaysia, M$429 for a
household of 5.24 in Sarawak and M$533 for a
household of 5.36 in Sabah. Relative poverty, on the
other hand, is measured by taking the average income
of, say, the bottom 40 per cent of households and
then estimating the number of households or
individuals that are found to be below his relative
poverty line income. There are all sorts of
limitations of both conventional measurements; the
absolute poverty line approach income can be, for
example, insensitive to transfers of income among
the poor and fails to capture the intensity of being
poor while the relative poverty measure, in effect,
is a measure of income inequality. There are other
alternative measurements such as those which take
into account the distribution of income among the
poor (a Sen-index) and those which capture the
extent of the 'distance' or shortfall of the income
of the poor from the poverty line (poverty gap
measurement).
 
Using the conventional approach it appears that the
incidence of poverty i.e. absolute poverty in
Malaysia, has declined dramatically from about half
(49.3 per cent) in 1970 to about 17 per cent in 1987
(Table 9). The OPP poverty target, appears to have
been reached slightly ahead of the time schedule.
The achievement, therefore, is remarkable and the
full success story has yet to be told. The progress
over the 1970-87 period has not been that uniform;
the decline in poverty was much better during the
197084 period than after that.  Growth was much
higher during the pre-1984 than after 1984 which was
a period of low growth at least up to 1986. Using a
per capita poverty line would give a lower incidence
of poverty in Peninsular Malaysia-35.1 per cent in
1976 and 12.4 per cent in 1987.
 
Poverty in the urban and rural areas also declined
over the 1970 - 87 period. It would appear that
although rural poverty still accounted for the bulk
of poor households, the share of the urban poor has
increased; by 1987, 17 per cent of the poor were
from the urban areas compared with 10.8 per cent in
1970, 12.4 per cent in 1976 and 16.8 per cent in
1984. Rural-urban migration, especially that of
Bumiputeras, has contributed to this change in the
profile of poverty in the country.  Consistent with
this trend the share of rural poor households to
total poor households has declined slightly, from
89.2 per cent in 1979 to 83 per cent in 1987. The
relative incidence of poverty measurement (ratio of
percentage distribution among poverty households to
percentage distribution among all households) showed
a slight increase for urban poverty, 0.43 in 1979 to
0.47 in 1987. The available statistics suggest that
the level, or intensity of poverty in Peninsular
Malaysia, as measured by the mean income of the
poor, between urban and rural areas by the mid
1980s, showed little difference. In 1984 the mean
income per month of the urban poor households was
M$205 compared to M$208 for the rural areas and by
1987 the comparable figures were M$228 and M$224
respectively. It seemed also to have narrowed for
Sarawak.
 
The progress in poverty decline reported for
Peninsular Malaysia disguises the performance of
individual states (Table 10). The decline in the
incidence of poverty over the period 1970 - 84 in
the states has been rapid and all recorded a decline
in the level of poverty. But the post-1984 period
showed that not all states enjoyed the continuing
trend in the falling level of poverty. The incidence
of poverty in Terengganu, Wilayah Persekutuan,
Negeri Sembilan, Selangor and Sabah increased
between 1984 and 1987. This is probably due to the
low commodity prices in Terengganu (oil) and Sabah
(timber) while the urbanised state of Wilayah
Persekutuan, Negeri Sembilan and Selangor suffered
from the recession which hit construction and
manufacturing particularly hard. This is consistent
with the increase in the share of urban poverty. All
the five states which suffered an increase in the
level of poverty also suffered a fall in the level
of their mean income. More surprising, however, are
those states which maintained or registered a slight
fall in their incidence of poverty despite showing
no growth in their average income (Johor and Perak)
or decline in their level of income (Melaka and
Pahang). There is also a shift in the concentration
of the poor between the states since the mid-1970s
with the share of the poorest states (Kedah,
Kelantan, Perlis and Terengganu) to the total poor
households increasing from 42.3 per cent in 1976 to
44 per cent in 1987. Again, in line with the growing
share of urban poverty, the proportion of the poor
households to the total poor households for Penang,
Selangor and Wilayah Persekutuan, the most urbanised
states, increased from 14.3 per cent in 1976 to 16.7
per cent in 1987. At the level of the states in
Peninsular Malaysia there is a trend in two
directions, the first showing an increasing
concentration of poverty in the poorest states and
the second, a share of the total poor in the most
developed and urbanised states in Peninsular
Malaysia.
 
Sabah and Sarawak occupy a somewhat special
position. As mentioned earlier Sabah experienced an
increase in the incidence of poverty over the slow
growth years of 1981 86.  What seems surprising is
that compared with the other states in Peninsular
Malaysia the average household income of Sabah and
Sarawak is high, with Sarawak ranking third and
Sabah fifth among the thirteen states, therefore, in
terms of the incidence of poverty Sabah ranked
second and Sarawak fifth in 1987. Thus, in spite of
relatively high average levels of income in both
states, Sabah and Sarawak also have high levels of
poverty in 1987.
 
The five identified target groups, rubber
smallholders, padi farmers, coconut smallholders,
fishermen and estate workers account for a sizeable
proportion of the total poor in the country-as much
as 36 per cent in 1984 and a third in 1987.
Excluding the estate workers, because of
difficulties in making comparisons, the four other
poverty groups in Peninsular Malaysia accounted for
about half of the total poor households in 1970, a
third in 1984 and 32 per cent in 1987. The progress
made in reducing the level of poverty among these
target groups was much faster over the 1970 - 76
period than after 1976.  By 1987 padi farming
households, with about half still below the poverty
line, continued to record the highest level of
poverty. Although these four groups registered a
reduction in the incidence of poverty they still
accounted for the bulk of the poor households in the
country. The fortunes of these target groups over
the 1984 - 87 period diverged a little, with poor
households engaged as fishermen suffering an
absolute decline in their average income (M$262 in
1984 to M$251 in 1987) and an almost stagnant
average income for coconut smallholding households
(M$221 in 1984 and M$225 in 1987). For fishing and
coconut smallholding households, the evidence
indicates that, even the non-poor households
suffered a decline in their average income over the
1984 - 87 period.
 
All ethnic groups recorded a fall in the incidence
of poverty although there were large differences in
the levels between the major ethnic groups. By 1987,
the Bumiputeras still had the highest incidence of
poverty (23.8 per cent) followed by the Indians and
the Chinese. Although the comparisons are not that
accurate (because of the use of a per capita poverty
line income) in Peninsular Malaysia the level for
the Bumiputeras had declined from about 46 per cent
in 1976, to about 24 per cent in 1987 while for the
Chinese it fell from about 17 per cent to 8 per cent
and for the Indians, from 27 per cent to 10 per cent
over the same period.  Poverty in the country has
become increasingly a Bumiputera phenomenon. In 1976
about three-quarters of the poor were Bumiputeras
but by 1987 their share had increased to about 80
per cent of the total poor. Although there are no
statistics to back-up our observation it would seem
that in many of the states especially in Kedah,
Kelantan and Terengganu, poor Malay households have
increased. It may well be useful to raise the
question, as to who on the average, is now the
poorest racial group in the country?  Additional
probings will be required but it may well be that in
a number of states, especially those in the urban
areas, the mean income of a poor Chinese and
Bumiputera household could be very close, implying
that the poor urban Chinese are probably the
poorest. The evidence points to the fact that the
average income of the poor household in the urban
areas, where the Chinese predominate, is now almost
as close to the average income of the rural poor,
where the Malays predominate. Besides Selangor,
Negeri Sembilan and Wilayah Persekutuan, where the
proportion of Chinese is the highest, not only has
the incidence of poverty increased but the average
income of the poor has declined in absolute terms.
 
The ethnicity aspects of poverty in Sabah and
Sarawak differ slightly from that of the states in
Peninsular Malaysia. The incidence of poverty for
Bumiputeras in Sabah increased over the 1984 - 87
period, with no change for the Chinese and a sharp
reduction for the others. By 1987 the Bumiputeras
accounted for about 97 per cent of the poor
households compared to 91 per cent in 1984. In
Sarawak poverty fell for all races although the
Bumiputeras, as in Sabah, accounted for the bulk of
the poor-about 91 per cent in 1984 and 1987.
 
Supplementing the measurement of the incidence of
poverty with the measure of the poverty gap can
provide a useful indication of the magnitude of the
poverty problem, in terms of the resources that are
required to eradicate poverty. As there are no
available statistics for estimating the poverty gap,
a crude measure can be derived from the published
statistics. The crude poverty gap measures the
shortfall of the average income of the poor from the
poverty line income and the quantum of the poverty
gap is derived by multiplying the income shortfall
with the total number of poor households. In 1987
the crude poverty gap for Peninsular Malaysia,
amounted to about M$60.7 million per month.  This
means that it would take the amount of financial
resources to lift all the poor households up the
poverty line income in 1987. This measure implies,
that eradicating absolute poverty is not an
impossible task and could be within reach if all the
financial resources are channelled to the poor
households with zero leakage. But it will take more
than the estimated amount owing to the cost of
delivery.
 
Employment Restructuring. The employment
restructuring target of the NEP is that by 1990, the
employment structure should reflect the racial
composition of the population. Because of changing
composition and trends of the population employment
restructuring has to be assessed on the basis of the
estimated population structure by 1990. According to
official estimates in Peninsular Malaysia in 1988
the Bumiputeras accounted 57.6 per cent of the total
population, Chinese 31.8 per cent and Indians 9.9
per cent. By 1990 the figures are expected to be
58.3 per cent for Bumiputeras 31.2 per cent Chinese
9.8 per cent Indians and 0.7 per cent Others. In
Sabah and Sarawak the ethnic breakdown is different,
with the Bumiputeras in 1990 estimated to reach 85.5
per cent in Sabah and 71.3 per cent in Sarawak. If
the assessment is to be on a Malaysia-wide basis
then the ethnic breakdown of the population will be
substantially different; Bumiputeras will account
for nearly 70 per cent of the total population.
 
Employment restructuring has progressed throughout
the 1970s and 1980s with more Bumiputeras having
moved into the modern sector and higher paying
occupations. But the pattern of employment still
does not adequately reflect the racial composition
of the population (Table 11). The main concern of
employment restructuring is to accelerate Bumiputera
entry into the high growth sectors. This would mean
shifting them out of agriculture into industry,
especially manufacturing.  By the end of the decade
it is estimated that the Bumiputeras will account
for about three-quarters of the employed in
agriculture, a little more than two-thirds in
government services (68 per cent) and about 44 per
cent in manufacturing. Thus the efforts to
accelerate their movement into nonagricultural
sectors have not been too successful .
 
This is even more apparent when the occupational
restructuring is examined.  Despite the increasing
supply of Bumiputera professionals and skilled
labour, they are still disproportionately
represented in the lower unskilled categories. They
made marginal advancements into the professional and
technical occupations. By 1975, they accounted for
48 per cent of those employed in this category (a
large percentage of whom were teachers and nurses)
compared with 47 per cent in 1970 in Peninsular
Malaysia. An overwhelming proportion of Bumiputeras
are still in agricultural occupations, and their
share by the end of the decade, will remain at about
three-quarter. Bumiputera representation in key
occupations has not shown very rapid progress as by
1990 they are estimated to reach only about 46 per
cent compared to about 44 per cent in 1980. When the
proportion of registered professionals (e.g.
doctors, architects, engineers and lawyers) are
taken into account their underrepresentation is even
more glaring; by the end of 1988 only a quarter of
the registered professionals were Bumiputera,
compared to 58.4 per cent and 14.3 per cent noted by
the Chinese and Indians respectively.
 
These changes in the ethnic structure of employment
were accompanied by changes in the population
structure, employment growth, urbanisation rate and
the growth of the economy. It is clear that a faster
rate of growth led to higher growth in employment
and better prospects for the absorption of
Bumiputeras into private and public sectors.  Slow
growth during the post-1980 years has increased the
rate of unemployment among Bumiputeras from 7 per
cent in 1980 to 7.6 per cent in 1985 and an expected
higher level of 8.7 per cent, compared to 8 per cent
for the Indians and 5.7 per cent for the Chinese by
1990. By the end of the decade official estimates
show that about 351,000 of Bumiputeras
(two-and-a-half times more than the Chinese) will be
unemployed and this accounts for 65 per cent of the
total unemployed. As much as 91 per cent of the
registered unemployed graduates are Bumiputeras. An
ethnically asymmetrical situation in the labour
market is emerging, characterised by an
under-representation of Bumiputeras in the high
skilled occupations and their over-representation
among the unemployed. The freeze in recruitment by
the public sector, a very large employer for the
Bumiputeras and a similar dampening in private
sector employment, have contributed to the worsening
of employment opportunities then.
 
Population growth among the Bumiputeras has been
much higher than the non-Bumiputeras and has swelled
the number of Bumiputeras entering the labour
market. The upward trend in fertility among the
Bumiputeras has been the main factor explaining
their increasing population growth rate. Population
growth for the Bumiputeras in Peninsular Malaysia in
the 1970s was lower than for the 1980s; in the
seventies Bumiputera population grew at a rate of
2.8 per cent per annum compared to 2.9 per cent for
the early eighties (1981 - 85) and an estimated 3.2
per cent for the second half of the eighties. For
the eighties, the Bumiputera population growth rate
will probably reach about 3 per cent per annum
compared to slightly less than 2 per cent for the
non Bumiputeras. With this sizeable population
growth rate a substantial number of Bumiputeras will
be entering the labour force in the 1990s and their
absorption into gainful employment opportunities
will have to be given greater prominence.
 
The ethnic differentials in labour supply has also
been influenced by the differentials in the
population growth rate between the urban and rural
areas for the major ethnic groups. The growth of the
Bumiputera population in the urban areas has been,
and continues to be, higher than that of the
non-Bumiputeras due to the combined factors of the
higher fertility rate and rural-urban migration
Bumiputeras. Overall, the urban labour force has
been growing at slightly more than three times the
rate of the rural labour force in the early 1980s, a
trend which is carried through to the remaining part
of the decade. In the eighties, in Peninsular
Malaysia, the Bumiputera urban population grew by
about 6 per cent per annum compared to about 2.7 per
cent for the Chinese and 3 per cent for the Indians.
These demographic and population changes will change
sharply the ethnic population distribution and by
1990 about 46 per cent of those in the urban areas
will be Bumiputeras, 44 per cent Chinese and 10 per
cent Indians. The comparable figures for 1970 were
27 per cent for Bumiputera, 63 per cent Chinese and
9.8 per cent Indians.
 
Ownership Restructuring. Over the years the original
target for the restructuring of ownership has been
narrowed; from aiming for at least 30 per cent
ownership of wealth for the Bumiputeras it has
narrowed to at least 30 per cent ownership of share
capital in limited companies in Malaysia.  There has
been progress in the restructuring of the ownership
of share capital but the Bumiputera ownership of at
least 30 per cent is not going to be reached by 1990
(Table 12). The subsequent targets have been
expanded to include other Malaysians and foreign
residents so that the final targets are at least 30
per cent for Bumiputeras, 40 per cent other
Malaysians and 30 per cent foreign interests.
Official sources indicate that Bumiputera ownership
has increased from about 4.3 per cent (M$227
million) in 1971 to an estimated 19 per cent in 1990
(M$21,996.2 million) while other Malaysian residents
increased their ownership from 34 per cent in 1971
(M$2,233 million) to an estimated 56.7 per cent
(M$63,124.5 million) in 1990, with the share of
foreign interests falling from 62 per cent in 1972
(M$4,051 million) to an estimated 23.4 per cent
(M$26,352.8 million) in 1990. These are aggregative
figures and they tend to hide the ownership
situation by sectors; Bumiputera interests are in a
more commanding position in banks and financial
institutions, plantations and mining but less so in
manufacturing, construction and commerce. If control
is also taken into account, along with ownership,
the position, in all likelihood, would also show the
Bumiputeras to be in a better position than that
suggested by the figures for ownership of share
capital, although the precise extent of the
Bumiputera control in limited companies would still
be disputable. Over the years the dominant ownership
position of the trust agencies has declined; in 1971
as much as 40 per cent of the total Bumiputera
ownership was held by trust agencies but by 1990 it
is anticipated that the percentage will decline to
about 31 per cent.
 
There are a number of sources of the growth in
capital accumulation by Bumiputera-restructuring of
companies, acquisition of companies (especially
foreign owned and control), growth of existing
private Bumiputera companies and the growth of
Bumiputera ownership through the trust agencies
especially ownership through the Amanah Saham
Nasional scheme. Bumiputera capital accumulation
grew at a much faster rate during the 1970s than the
1980s; Bumiputera share capital grew at about 31.4
per cent per annum during the seventies (1972 - 80)
compared to 27.3 per cent per annum over the 1981 -
85 period and an expected 7.9 per cent per annum
during 1986 - 1990. The growth of the equity stock
was largely influenced by the growth of GDP and
private investment and the 'deepening' of the
capital market. In 1975 the share capital/ GDP ratio
amounted to 0.87 (using constant 1970 prices) in
1985. The rising level of Bumiputera income and
changing habits and preferences towards savings and
investment helped to accelerate capital
accumulation. Government policies and intervention,
especially policy guidelines containing quotas for
Bumiputera ownership and influencing the price of
shares also played a key role in raising Bumiputera
ownership.  Although precise estimates of the
ownership by non Bumiputeras are difficult to come
by, the official figures suggest that the Chinese
ownership of share capital had reached about a third
in 1985 and would remain at about that level (32.5
per cent) by 1990 while the proportion that is to be
held by the Indians are expected to remain at about
1 per cent (1.2 per cent) by the end of the decade.
 
Ownership of wealth by ethnic groups, the original
concern of ownership restructuring remains a
lacunae. Wealth covers a wide range of assets,
tangible and non-tangible. Share capital or
corporate stock, is part of financial assets and
other financial wealth include government bonds and
bank balances/deposits in commercial banks.
Tangible wealth, on the other hand, includes land,
(agricultural and non-agricultural) and,
reproducible assets (dwellings, equipment,
inventories, livestock and consumer durables).
Rising income level, urbanisation and education
have, probably, increased the wealth-holding of
Bumiputeras in tangible and non-tangible assets in
the post-1970 period, although to what extent the
wealth gap between Bumiputeras and non-Bumiputeras
has been narrowed is difficult to say.
 
Bumiputera Commercial and Industrial Community. An
important objective of the NEP is to nurture the
growth of a BCIC, or the development of Bumiputera
entrepreneurs. It is difficult to assess the extent
of the success of this aspect of the NEP beyond
noting the fact that substantial resources have been
channelled to the Bumiputera community. The
programmes for entrepreneurial development include
financial assistance, consultancy services, advisory
and training, technical assistance, administrative
support and direct government participation in the
private sector. An extensive number of agencies have
been involved in the development of Bumiputera
entrepreneurs including MARA, ITM, IKM PERNAS, UDA,
MIDF, MIDFIC, CGC, BPMB NPC, SEDCs and Bank
Bumiputera.
 
A key approach of these entrepreneurial development
programmes has been to use quotas and the price
mechanism to allocate the resources to the
Bumiputera quotas and prices in many of these
programmes have been biased in favour of the
Bumiputeras. Preferential treatment for the
Bumiputeras has been the driving force behind these
policies with quotas being reserved for Bumiputeras
in, say, training and educational institutions and
for the granting of preferential price treatment to
Bumiputeras of tenders, business premises and the
price of shares. Going by the performance of
Bumiputera enterprises owned by trust agencies and
private Bumiputeras the development of Bumiputera
entrepreneurs has not been very impressive.
 
A very large number of the companies in which there
is government interests has performed poorly and the
opportunities for salvaging them remains bleak. The
recession years in the early eighties also have
affected badly Bumiputera enterprises and the
seriousness of the problem is evidenced by the fact
that a rehabilitation fund for the Bumiputera has
been set up to assist those enterprises in
difficulties.
 
Income Distribution. All these developments can be
reviewed and assessed within the framework of the
distribution of income. Again because there are all
sorts of limitations imposed by the lack of data on
the size distribution of income the assessment will
have to be rudimentary.  Leaving aside the
conceptual and statistical difficulties of measuring
income and income inequality the evidence suggests
that over the seventies there has been little change
in the size distribution of household income but
with some indications of a slight widening.  Income
inequality improved after 1979/80 up to 1987, the
latest available official figures derived from the
Household Income Survey, 1987. Generalisations over
a period of seventeen years will, of course, hide
the unevenness in trend in the income inequality.
Statistics by deciles show that households in the
bottom 40 per cent of the distribution increased
their share of total income from 11.4 per cent in
1973 to 11.9 per cent in 1979, 12.8 per cent in 1984
and 13.8 per cent in 1987 (Table 13).
 
The average household income of all races increased,
at least up to 1984, after which there was an
absolute decline in 1987.
 
The trends in income inequality did not show a
consistently downward trend over the 1970s. Some
evidence would suggest that it widened during the
first half of the 1970s (1971 - 76) in Peninsular
Malaysia. For Sabah and Sarawak, it is uncertain
what happened during the first half of the 1970s but
it probably either did not improve or widened
slightly from the mid-seventies to the end of the
decade. From then on inequality narrowed for both
Peninsular Malaysia, Sabah and Sarawak, with the two
states' level of inequality being marginally higher
than in Peninsular Malaysia. Inequality in the urban
and rural areas also showed different trends. In
Peninsular Malaysia at the beginning of the NEP the
level of inequality of the urban areas was much
higher than in the rural areas but towards the end
of the 1980s (1987) the urban-rural inequality gap
narrowed. Overall, urban inequality is still higher
in the urban than the rural areas. In Sabah and
Sarawak, however, rural inequality is higher than in
the urban areas by 1987. Available data indicate
that rural inequality has increased probably up to
the early eighties (1984) and has remained at about
the same level by 1987 while inequality in the urban
areas has fallen slightly. Urban inequality in
Sabah, probably, has increased up to 1984 but began
to decline by 1987. In contrast to Peninsular
Malaysia, income inequality in rural areas for Sabah
and Sarawak is slightly more unequal than in the
urban areas.
 
Growth has enabled all races to raise their income
level but at different growth rates with the
Bumiputera average household income growing at a
higher rate than non Bumiputera average income.  In
1970 Malay mean monthly household income (constant
1970 prices) was about 44 per cent of Chinese income
and 56 per cent of Indian income but by 1987 it
increased to about 61 per cent of Chinese income and
80 per cent of Indian income.  This gives
Chinese:Malay income disparity ratio of 2.29 and a
Indian:Malay disparity ratio of 1.77 for 1970 and
1.65 and 1.25 for 1987 (Table 14). There is no
comparable data to show the trends in the racial
income disparity ratio for Sabah and Sarawak. By
1987 the mean monthly household income of the
Bumiputera was about 38 per cent of Chinese income
giving a disparity ratio of 2.6. In Sarawak,
Bumiputera income was about 53 per cent of Chinese
income giving a disparity ratio of 1.87. Although
evidence on the trends in intra ethnic income
inequality is difficult to come by the available
data suggests that over the 1970 - 87 period
inequality among the Bumiputera has increased and
the level of inequality was higher than the
non-Bumiputera, by the end of the decade.
 
Summary measures of the distribution of income do
not capture the extent of the racial income
imbalances between the major ethnic groups. The
racial income imbalances show that in 1970 the
absolute difference in mean monthly household income
(in constant 1970 prices) between the Chinese and
Malay in Peninsular Malaysia was about M$222,
increasing to M$350 in 1979, M$470 in 1984 and
falling to M$398 in 1987.  Thus, over the 17-year
period the absolute difference in Chinese and Malay
household income increased by almost 1.8 times. In
Table 15 and Table 16 are shown the income
imbalances between Bumiputeras and non Bumiputeras.
The racial income imbalances are even more glaring
when the income levels by the decile groups are
compared within each ethnic group. For all ethnic
groups in 1987, the average income of the richest
group, the top 20 per cent of households, was about
7.4 times that of the poorest group, the bottom 40
per cent of households, giving an absolute income
difference of M$1,686 while the income of the middle
class, the middle 40 per cent, was about 2.5 times
that of the bottom 40 per cent, or an absolute
income difference of M$403.  In 1987 the absolute
income difference between the average Chinese
household in the top 20 per cent, compared to the
Bumiputera household in Peninsular Malaysia was
about M$936 and the comparable figures for the
middle 40 per cent and bottom 40 per cent was M$363
and M$164. The absolute income imbalances between
the Bumiputeras and Indians were smaller when
compared with the Chinese- M$277 for the top 20 per
cent, M$145 for the middle 40 per cent and M$108 for
the bottom 40 per cent. In Sabah and Sarawak the
absolute income imbalances, especially in Sabah,
were larger than in Peninsula Malaysia.
 
 
3. LESSONS FROM THE IMPLEMENTATION OF THE NEW
ECONOMIC POLICY
 
There are a number of lessons that can and need to
be learnt from the experience with the NEP for the
last 18 years. This section will highlight the most
important ones. First, there has been an excessive
optimism over the ability in forging a more united
nation without being critically aware of the limits
of the means that are at the disposal of the
government. The chain of reasoning linking the NEP
positively and optimistically with national unity is
a long one and may appear unconvincing to many.  The
conditions set for implementing the NEP have been
somewhat demanding, particularly the caveat that it
should not lead to anyone feeling any sense of
deprivation. The circumstances on which such an
outcome can be fulfilled can also be extremely
limited, if not impossible to fulfill because
redistribution, even through growth, will leave
someone, somewhere with some sense of deprivation,
if not in an absolute sense, in a relative sense.
Excessive faith also appears to have been put on the
unity or enhancing integrating properties of
economic growth; growth can be destabilising in some
circumstances leading to the decline in some lines
of economic activities, loss in economic
opportunities with structural changes and the
erosion of competitiveness. So much of the alleged
failure to achieve national unity has been blamed on
the implementation of the NEP that the sense of
balance and objectivity in assessing the impact of
the policy has been missing.
 
Second, one of the most important, and most obvious,
lessons that has been learnt is that the notion of
equity and fairness is an extremely difficult one to
deal with. It has meant different things to
different people, as for example, the belief that so
long as the allocation of resources is made on the
basis of ethnicity there can never be a real sense
of being treated fairly.  There is an intrinsic
appeal in tying the notion of equity and the
redistribution of economic opportunities on the
basis of a group's share in the total population, a
notion of proportional equality; but this has not
been systemmatically pursued as can be seen in the
asymmetrical approaches in employment and ownership
restructuring, with employment being based on
proportional equality (reflecting the racial
composition of population at all levels), while for
ownership this approach has not been used. It would
seem too that while there has been some consensus on
the ends, or objectives, of the NEP, there has been
a great deal of disagreement, and disenchantment, as
to the means of achieving those ends. While the
ownership target is to achieve at least 30 per cent
Bumiputera ownership of share capital in limited
companies by 1990, there has been much
discontentment if companies are requested to
allocate more than 30 per cent of their share
capital to Bumiputeras. While there is agreement
with the target for an employment structure which
reflects the racial composition of the population at
all levels there has been disagreement over the
enrollment policies at the tertiary level of
education which is biased more towards Bumiputeras,
even when it is acknowledged that the supply of
educated and skilled Bumiputeras is in very short
supply, or when hiring shows more preference for
Bumiputeras. There should be additional concern,
apart from having an equitable employment structure,
over what has been happening to the structure of
unemployment. The additional lesson here is that,
while there has been some progress in the
restructuring of employment, the unemployment
structure can be said to be less than equitable as
the highest level of unemployment now is found among
Bumiputeras, followed by the Indians and the
Chinese. There is no interest in having proportional
equality in the structure of unemployment.
 
Third, there is a difficult lesson that has to be
learnt on the credibility of statistics on the NEP.
There is a substantial difference in faith, or
belief, that has been put on the official statistics
which show the progress, or lack of it, in poverty
alleviation and the restructuring of the ownership
of share capital. Critics of the official statistics
find it difficult to accept and believe that the
incidence of poverty can ever come down that rapidly
and substantially or, on the other hand, that
Bumiputera ownership of share capital is that low
and has not increased that fast, or even exceeding
30 per cent.  There is thus an urgent need for
greater transparency and accessibility to the
official statistics that have been collected by the
government to enable researchers and other
interested parties to supplement their own
statistics and to verify the findings on the
progress on the NEP. The basis for many of the
statistics also have to be publicised to enable a
proper assessment of their reliability and
credibility.
 
Fourth, the brief review of growth, poverty and
inequality suggests that growth has been beneficial
in reducing both the level of poverty and income
inequality over the 1970- 1987 period, although the
post-1984 recession and economic slowdown has had an
adverse effect on the level of income of households
subsequently. With a growth rate averaging about 8
per cent during the 1970s and about 6 per cent
during the 1980s, the incidence of poverty has
declined and income inequality has improved. The
growth of the nonagricultural sector, especially
manufacturing, has played a crucial part in lowering
the incidence of poverty and improving inequality
through the provision of employment for new labour
force entrants. Higher growth rates leading to
better employment opportunities can lead to poverty
eradication and improve in equality if accompanied
by the appropriate combination of development
strategies.
 
Fifth, there are some additional lessons that can be
learned from the strategy of using the state as a
trustee and as a means of accelerating Bumiputera
participation in industry and commerce. It is
difficult to control the growth of the public sector
as long as the major justification for its growth is
that it is furthering the interests of the NEP. The
state as an entrepreneur may be contradictory in
terms and, as has been amply shown in the past few
years, even with economic shocks it is difficult to
cut down the size of the public sector. The record
of most of the public enterprises has been quite
dismal; shielded by competition, amply protected
with preferential access to finance and other
resources the public enterprises have fulfilled the
low expectations of the critics of government
intervention in the economy. Sustaining state
intervention in the economy has demanded substantial
financial resources; the supply of financial
resources for the 1970s to finance the growth of the
public sector has not been the key limiting factor
but the supply of able and qualified manpower has
been a major constraining factor in the performance
of public enterprises.  Wastage, with rare
exceptions, has been quite rampant among public
enterprises due to the lack of clear accountability
and control. The phenomenal growth of the state
during the decade of the 1970s has been fostered by
a belief in a seemingly unlimited supply of
financial resources and excessive optimism with the
capabilities of the state as an entrepreneur. A
mixture of vested interests combined with the public
enterprises as a source of patronage and employment
opportunities for bureaucrats, made it difficult to
check the rapid growth of public enterprises. At the
same time, the growth of the public enterprises in
each state, through the SEDCs for example, made it
difficult to co-ordinate and control the expansion
of the activities of the government in industry and
commerce resulting in much duplication and waste.
The list of unprofitable subsidiaries of these
public enterprises is a measure of this failure.
 
Sixth, the trusteeship approach in aiding
Bumiputeras in moving into industry and commerce
through holding their ownership of share capital on
a temporary basis, and the rules and conditions for
getting access to the equity stock, has helped
perpetuate a 'dualistic' market for ownership and
control. This parallels the market for Malay
Reservation land which is restricted, while an
almost free market for other land operate along
side. In the case of the equities market there is on
the one hand, market where shares are traded openly,
while on the other hand is the Bumiputera capital
market within which the circulation of Bumiputera
capital is confined.  Another example is that owners
of share capital under the Amanah Saham Nasional
(ASN) are prevented from selling their unit trusts
on the open market but have to redeem their unit
trusts to ASN. The abolition of the Bumiputera share
market recently and present attempts to list the
going concerns on the second board is an attempt to
remove this parallel capital market.
 
Seventh, the ownership arrangements and the schemes
practised over the past eighteen years have fostered
the growth of a rentier entra prominent class.
Gaining access to the relative low-priced shares in
the leading and large companies has been made very
easy through the restructuring schemes which have to
comply with the NEP equity conditions. Buttressed by
a reduced share price on the one hand, and the
availability of subsidised credit to finance the
purchase of shares on the other, the Bumiputera
rentier class has been assured of a ready and
permanent supply of guaranteed income-earning
assets. Through these state-managed investment
arrangements the NEP has reduced the risks
uncertainties associated with investment for the
Bumiputera rentier class. The question is, having
had the initial push, whether the favoured
Bumiputera can develop into a genuine entrepreneur
on his own or in partnership with others, including
non-Bumiputeras.
 
Eighth, an important lesson which must be taken into
account has to do with the quality of the educated
Bumiputera manpower. The very sizeable movement of
Bumiputeras into the modern sectors, especially into
industry and commerce, has not been reflected in the
increasing level of productivity of Bumiputera
enterprises. The supply of educated Bumiputeras,
especially at the tertiary level, has grown
tremendously during the post-1970 period. But the
quality and performance of the educated Bumiputera
manpower leaves much to be desired. For too much
emphasis has been given to the quantity at the
expense of quality and a continuation of this trend
would do little to raise the quality of the human
capital of the Bumiputera community.
 
Ninth, there are a number of implementation lessons
that have become 'more and more pressing. As it is
not always clear what the NEP really has meant to
policy makers, planners and implementors in the
government, including those in the private sector,
and how they should go about implementing it, the
situation has given rise to much ambiguity and
uncertainties. In the absence of clear principles of
implementation the agencies and bureaucrats have had
a relatively wide degree of freedom in interpreting
and implementing the NEP. There are numerous
examples, including the notion of growth and, for
ownership restructuring whether the burden is to
fall on only some companies or all companies and
whether it should be on a global or individual
basis. There are many more but even these provide
ample room for 'policy drift' which has to do with
the meanderings and unco-ordinated interpretation
and ambiguities that accompanied the implementation
of the strategy and policies at both the federal and
state levels. Encouraged by these uncertainties and
ambiguities the ever growing bureaucracy and other
affiliated government agencies invested much of
their resources into devising ingenious approaches
that gave novel twists and turns to the main
strategy and policies while still maintaining a
veneer of a consistency with the broad direction but
in doing so were instrumental in accelerating the
policy drift.
 
4. GLOBAL ADJUSTMENTS AND TRENDS IN THE ASIA"PACIFIC
REGION IN THE EIGHTIES
 
The formulation of the post-1990 economic policy
will have to take into account the changing
condition of the world economy and the implications
of global adjustments on developments in the
Asia-Pacific region which will determine Malaysia's
own long-term economic outlook. This section will
review these salient developments as the background
for the Income Doubling and Distribution Plan which
we have proposed as the framework for the new
economic policy in the next decade.
 
4.1 Structural Change in the Asia Pacific Region and
the Emergence of the East Asian Industrial Belt
(EAIB)
 
There were two major changes in the world economy in
the 1970s and 1980s. First is the growing
internationalisation of productive activity through
the export of capital from the centres and the
development of off-shore facilities by transnational
corporations (TNCs). The massive spread of TNCs in
recent decades adds a new element to the North-South
division of labour in the world economy through the
imposition of an internal organisational division of
labour within the TNCs. This internal division of
labour implies that, particularly in industries and
services, control over technology and innovation
remains in the advanced industrialised countries,
while the routine and standardised manufacture and
marketing of products for domestic or local markets
are located in the developing countries. The
internal transfers of inputs and outputs (for
vertically integrated organisations) as well as
their exports from off-shore production zones
constituted a significant proportion of the
import-export trade of the Third World countries in
the 1970s.
 
The second change is the emergence of some
developing countries, namely the Asian newly
industrialised countries (ANICs) including South
Korea, Taiwan, Hong Kong and Singapore, as major
exporters of cheap consumer products to advanced
industrialised countries. Such manufactured exports
are at the latter stages of the product cycle and
were actively promoted by their governments which
successfully stage managed, through appropriate
policies and incentives, the switch from
import-substitution to export-led growth in the
1970s. It is this second transformation, not that
which is internal to the TNCs, which is the focus of
the new international division of labour, especially
with the rise of Third World transnationals and the
vigour of their exports to the advanced countries.
Most significant is the growth and response of the
ANICs to this changing world economic environment,
particularly as a result of the rising yen.
 
The emerging economic configuration in the
Asia-Pacific region is thus represented in the 1970s
by a belt of rapid industrial growth consisting of
Japan, the ANICs, and ASEAN which could be
strengthened in the coming decades by internal
policy adjustments and economic restructuring. The
role of his new economic configuration in the region
depends on the impact of investment and trade and
responses of its regional entities to adjustment
pressures in the coming decades within the context
of global restructuring.
 
The trade patterns that had emerged among
Asian-Pacific countries and between them and the
United States and the European Economic Community
were the result of rapid industrialisation that had
taken place in the 1970s and early 1980s among the
Asian countries. This increased trade flow was
created by the burgeoning US market for finished
products, and dominated by US Japan trade relations.
Two basic processes occurred during the period: (a)
adjustments at the global economic level to the two
"oil shocks" of 1973 and 1979, and the changing
comparative advantage in manufactured goods among
the advanced industrialised countries, and (b)
adjustments at the regional level to the rising
comparative advantage of the Asian newly
industrialised countries in light manufacturers and
of ASEAN in raw material exports, and an emerging
division of labour amongst Japan-NICs-ASEAN as a new
industrial belt (what we have called the East Asian
Industrial Belt, or EAIB) within the global economy.
The emergence of this area is induced by the
world-wide structural adjustments and industrial
relocation.
 
4.2 Regional Adjustments
 
 
These adjustments follow the changing dynamic
comparative advantage of the different countries in
the Asia-Pacific region in different sectors in the
industrialisation process. This resulting pattern
has been described as conforming to a so-called
'flying geese' pattern of development. In this
industrialisation process late-comers appear to have
successfully adopted a strategy of entering into
sectors in which they have a rising comparative
advantage in some cost terms and importing
technology from an already mature economy whose
comparative advantage in that industry seems to be
on the decline. The latter in turn began to invest
in new industrial products using new technology and
know-how for which they have the innovative edge.
This industrial restructuring and shifts in the
position of the economies involved in the global
specialisation and division of labour are not always
smooth and involve frictions in adjustment and
competition. The flying geese pattern is discernable
in the case of heavy industries whose production
focus seemed to have shifted from the US to Japan in
the 1970s, at the same time as a similar shift in
pattern appeared to have occurred in the light
manufactured goods industry from Japan to the ANICs
in the 1970s.
 
The situation in the late 1970s and early 1980s,
however, have reached a stage whereby within the
EAIB, the ANICs and ASEAN have become competitive to
Japan for different items in light manufacturing
production and exports to the US and elsewhere. As a
result of this, and that of the oil shocks and
adjustments in the post 197383 period when Japan
began to develop and adopt resource-saving
technology, Japan had been induced to be protective
of its "sunset light industries" against the NlCs,
as in the case of textiles, leather products, and
electrical products.  At the same time the NlCs
themselves are beginning to erect tariff and
non-tariff barriers against ASEAN lumber and wood
products, food processing, etc. In the past decade
the NlCs and ASEAN have had to depend on the
cross-Pacific trade, namely to the US and the EEC,
to sustain its export drive in consumer and light
industry.
 
The relative performance of Japan, ANICs and ASEAN
in trade in the three categories of manufactured
goods, namely, non-durable consumer goods, durable
consumer goods and capital goods, over the past
twenty years is reflected in the pattern of trade
specialisation coefficients that had emerged amongst
the three economic entities. In this regard, Japan
had become a net importer of non-durable consumer
goods since 1972, while the ANICs reached a peak as
net exporters of this product category around 1977.
ASEAN, on the other hand, became a net exporter of
consumer non-durable goods in the early 1970s, and
will likely catch up with the ANICs in this category
by the late 1980s. In the durable consumer goods
category, however, ASEAN remains a net importer and
is likely to remain so until the mid-1990s. The
ANICs on the other hand, became a net exporter in
the early 1970s and look set to challenge Japan in
this category in the early 1990s. However, it is
clear that Japan will remain dominant as a net
exporter of capital goods for some time to come,
although the ANICs will probably reach
"self-sufficiency" by the end of this decade and
themselves become a net exporter as they are already
doing so in some areas. ASEAN will continue to
depend on imports of capital goods for some time to
come from Japan, the ANICs and elsewhere.
 
This shift was made possible by the global
restructuring that had taken place particularly in
the US and EEC up to 1983. The pent-up demand for
consumer goods in the world's largest market, rising
labour costs inducing the relocation of off-shore
production facilities and the availability of cheap
labour in the East and Southeast Asia, as well as
active promotion of foreign investments through tax
incentives and other relief, have contributed to
rapid growth in manufactured exports from the EAIB
to the US and EEC.
 
On the other hand, the flying geese pattern of
industrialisation, while it has applied to the case
of light manufactured goods, had not proceeded so
far in the case of intermediate goods and heavy
industries. As a result, the situation is
complementary and trade amongst the EAIB has been
increasing. It consisted primarily of Japanese
sourcing from the NlCs and ASEAN in chemical
products, metal products, machinery and transport
equipment, and construction. The growth of this
trade constitute the major distinguishing feature of
trade in the region. However, this trade in
intermediate and heavy industries between Japan and
the rest of the EAIB appeared to be "crippled" in
that the possibility of imports of such goods that
are competitive with Japanese industries face
increasing protection, particularly of the non
tariff variety.
 
It is also the case that overall Japan presently
only imports 5 per cent of its intermediate goods
requirement, as compared with 20 per cent for West
Germany. There is therefore a strong case for
pushing Japan to increase its imports of
intermediate goods and heavy industrial products
from the NlCs and ASEAN countries in the future.
The expansion of intra-firm specialisation and
offshore relocation of Japanese and NIC intermediate
and heavy industries to ASEAN where there is natural
comparative advantage especially in resource-based
industries, should also lead to further trade within
the EAIB.
 
The role of transnational corporations in this trade
and investment activity in the region have
strengthened further the globalisation of production
in the EAIB. The importance of technology, finance
and market channels has been increasingly
demonstrated in the activities of TNCs. It remains
for the future to ensure that effective transfers of
technology do take place as well as the enhancement
of the spin-off effects of direct foreign investment
in the host economies.  Enhanced intra-firm division
of labour and the possibility of new decentralised
forms of organisation of production would be the
future direction of TNC activity in the region.
 
In regard to the foreign investment patterns, the
1980s, however, have seen a series of fundamental
changes in the foundation and structure of the world
economy such as the US-Japan trade imbalance; a
marked decline in the primary commodity and crude
oil prices; depreciation of the US dollar and
appreciation of the yen; and exacerbation of the
international debt crisis. These changes have
inevitably affected Japanese as well as other
Asian-Pacific economies, though the degree of impact
on each country differs. It is important to assess
what kind of impact the global adjustments will have
on the pattern of investment in the region and,
therefore, on Malaysia.
 
The present high yen and low US dollar situation had
stimulated Japan to relocate their production sites
overseas, a process that had begun in earnest since
1986. This may result in the future development of
capital goods and machinery parts industries as well
as other related industries in the ANICs, ASEAN and
other countries. On the other hand, pressures on the
currencies of the Asian "four tigers" as a result of
their burgeoning trade surplus, and withdrawal of
GSP privileges by the US, will also induce
relocation and new investment from the ANICs to
ASEAN and other developing countries in the region.
Consequently, the inter-industry structure of
developing countries in the region will likely
become more mature and diversified. Countries which
to date, have heavily relied on capital goods and
machinery parts imported from Japan will be less
dependent on Japan in the future as they continue
their industrialisation efforts. This may also
reduce the lopsided trade imbalance between Japan
and her neighbouring countries.
 
The interdependence of intra-regional trade and
investment will inevitably be intensified.  ASEAN,
for example, has been much more dependent upon Japan
and other developed countries than upon its own
fellow members. It will, however, be essential for
ASEAN member countries to establish a much closer
relationship on trade and investment among
themselves if the sub-region wishes to graduate from
LDC status by the early twenty first century. It is
presumed that direct investment form the ANICs to
ASEAN countries will increase. As for Japan, it is
inevitable that she will face increased pressure
from outside for easier access to her domestic
market and more positive action for economic
cooperation through increased direct investment in
the region.
 
Indeed in the past three years, there has been a
foreign direct investment boom, especially from
Japan due to the high yen. JETRO's White Paper on
World Direct Foreign Investment estimates that the
world's outstanding direct investment at the end of
1986 increased 20.4 per cent over the previous year.
The growth rate of outstanding investment in dollar
terms was 37.5 per cent for West Germany; 34.1 per
cent for the Netherlands; 32 per cent for Japan;
19.3 per cent for the UK and 13.1 per cent for the
US. In fact, Japanese direct foreign investment
outstanding grew at an annual rate of 20.1 per cent
from 1980 through 1985. The ANICs have also begun to
make commitments as foreign investing countries.
 
While the US was the major target of that investment
growth in the early eighties, direct investment in
Asian countries are also increasing, accounting for
50 per cent in 1985 and 53 per cent in 1986 of the
total investments in the developing countries. In
1986 Japan's investment in Asia was 73.8 per cent
over the previous year, second only to West Germany
which grew by 91 per cent for the developing
countries as a whole. The growth of Japanese direct
foreign investment inflow to various Asian countries
had continued apace with Thailand, South Korea and
Taiwan leading the way. Malaysia's DFI inflow was
103 per cent over the first eight months of 1987,
and this had tripled again in 1988. Thailand has
absorbed a large absolute share of Taiwan DFI in
1987 and 1988, while the growth of DFI in Malaysia
from both Taiwan and South Korea has shown a healthy
turn for the same period and is rising rapidly from
last year. The rising yen over the past five years
had also induced renewed growth in DFI by Japanese
small and medium-sized firms in Asia.
 
These trends in direct foreign investment marks a
distinct development towards greater structural
interdependency in the world economy, and in
particular the Asia-Pacific region which is fast
emerging as the most dynamic part of the world
e,conomy in the next century. In this global and
regional economic context, the thrust for Malaysia
in the future would thus have to be in finding a
niche in the world manufacturing export market,
diversifying the agricultural base for domestic
consumption, expanding the industrial base through
promotion of small and medium scale industries, and
through further privatisation of government
companies and services. New initiatives such as tax
reform and wage reform, and the promotion of small
and medium-scale industries will enhance the
restructuring process now taking place.  The New
Economic Policy after 1990 should also provide a new
impetus to private investment, from foreign as well
as domestic sources, with emphasis being given to
growth and economic liberalisation.
 
The importance of international factors in the
macroeconomic framework for Malaysia's development
over the next ten years need not be over-emphasised.
In a world economy that has become more
interdependent in terms of trade and investment, and
the globalisation of production and financial
markets, as it becomes at the same time more
competitive and uncertain, Malaysia's economic
management has to be that much sharper. The
long-term prospects for the Malaysian economy are
considered good because of the strong economic
fundamentals prevailing.  Strategies to be devised
for growth and distribution under the new economic
policy after 1990 will have to ensure that wealth
creation can be promoted under conditions of greater
productivity and efficiency, while vigilance over
the question of fairness in distribution will always
have to be maintained.
 
 
5. INCOME DOUBLING AND DlSTRIBUTION PLAN, 1991-2000:
INCOME DlSTRIBUTION AND RACIAL INCOME PAR TY
 
5.1 Goals of the IDDP
 
In November 1988, MIER proposed an Income Doubling
and Distribution Plan (IDDP) as the basic framework
for the post-1990 economic policy. A subsequent
revision of the IDDP idea additionally envisages
that the Plan should also achieve ethnic income
parity over the same period through the adoption of
appropriate development strategies to achieve a
fairer distribution of household income.
 
The growth prospects, and the income doubling target
over the period 1991 - 2000 will provide
opportunities for all races to raise their income
and standard of living during the post-1990 period.
The main development objectives of the IDDP will be
as follows:
 
* A growth rate of about 9 per cent per annum
 
* Double the per capita income from about M$5000 in
1990 and achieve any parity in
 
Bumiputera: non-Bumiputera average household income
by 2000
 
* Eradicate absolute poverty by 2000
 
* Full employment of labour force, at five per cent
unemployment, through growth and efficient
utilisation of human resources
 
* Raise further the standard of living through
education and widening the access to basic services,
such as health, water and electricity.
 
In other words, the IDDP is essentially an
accelerated growth with distribution plan.
 
5.2 Accelerating Growth through the Income Doubling
and Distribution Plan.

The IDDP envisages a doubling of the per capita GDP
from US$2100 (M$5,670) in 1991 (US$2000 in 1990) to
US$4200 (M$11,340) by the year 2000. This implies a
growth rate of per capita income over the ten years
of about 7.2 per cent per annum. Since the annual
population growth rate is taken as 2.6 per cent,
then the growth rate of real GDP in the IDDP has to
be around 9.8 per cent, or just under 10 per cent
per year.
 
The basic statistics involved in the IDDP
calculations are as follows:
 
We have also calculated the capital requirement to
achieve the growth in output under the IDDP over the
decade in question (See Table 17). Taking an
incremental capital output ratio (ICOR) of 3.5, a
reasonable assumption, the total capital requirement
for the IDDP is M$552 billion (US$204 billion). This
level of investment can be lowered to achieve the
output target if capital can more efficiently be
utilised to bring ICOR below 3.5.  How is this
capital requirement to be mobilised? If we were to
spread the total investment required over ten years,
starting with a target of M$43.2 billion (US$16
billion) as the initial investment in 1991, followed
by another US$17 billion in the next year and so on
annually by an increment of M$2.7 billion (US$1
billion), and ending with a capital outlay of M$67.5
billion (US$25 billion) in 2000, the yearly amount
will sum up to the required investment. If the
savings rate can be maintained at 30 per cent of
real GDP per annum, then the resource deficit has to
be financed from foreign savings either in the form
of loans or direct foreign investment. Table 17
shows the resource gap to be financed from external
sources which progressively declines from M$11
billion in the beginning of the IDDP to a surplus
situation by the year 2000. Clearly, the IDDP
envisages a definite role for foreign investment in
the Malaysian economy. Of the total investment of
M$43.2 billion required in 1991, direct foreign
investment could contribute 25 per cent (US$4
billion or M$11 billion), while the rest could be
split between the public sector (38 per cent,
amounting to M$16 billion) and the private sector
(37 per cent).
 
The secondary sector, namely industry, including the
oil and gas sector, and construction, is expected to
play the leading role in the IDDP. If we assume that
agriculture will grow at 4 per cent per annum, its
historical rate, and the service sector growing in
concert with overall growth of aggregate output at
more or less the IDDP rate, say 8 per cent per
annum, then the secondary sector is projected to
grow at 12.8 per cent in order to reach the income
doubling target.  The focus on rapid
industrialisation is inevitable as the main
generator of growth and exports as well as
employment. The sectoral breakdown over the IDDP
period is given below:
 
The sectoral shifts through accelerated
industrialisation under the IDDP has distributional
implications in functional and personal income terms
depending on the growth of labour productivity
between the sectors in the former case and the
choice of development strategy in the latter case.
The growth of agricultural productivity in
particular will have to be higher than 4 per cent
(for example, 8 per cent) per annum if agricultural
incomes are to converge and catch-up with the
average per capita income envisaged in the IDDP.
That is, agriculture will have to be more
capital-intensive, or become commercialised, and
consistent with the shift of labour out of
agriculture, if agricultural wages are to rise. On
the other hand, to increase labour absorptive
capacity of the secondary sector, growth of labour
productivity in the secondary sector should not be
more than 12.8 per cent per annum (that is,
industrial investment should not be too capital
intensive), for otherwise less employment will be
created in the secondary sector. If industrial
labour productivity grows more than 7.17 per cent
per annum, namely above the growth rate of per
capita income under the IDDP, then there will result
a divergence between agricultural and industrial
incomes causing aggravation of population shifts
between the two sectors. If industrial labour
productivity growth were to be kept below the
projected growth of per capita income, that is
through the appropriate choice of technology in the
industrialisation process, the result would be a
convergence of incomes between agriculture and
industry in the post 1990 era. Thus the IDDP calls
for a balanced industrialisation strategy between
large-scale and small and medium-scale industries,
as well as the appropriate choice between
capital-intensive and labour-intensive technology at
the sectoral and micro-level.
 
At the macro-level, the accelerated
industrialisation proposed in the IDDP implies a
tripling of industrial capacity in the country over
the next ten years. This will require not only new
capital formation in infrastructure, but also the
appropriate regional development and industrial
location policy. The growth of export-oriented
industries will emphasize further the growth of the
western corridor in Peninsular Malaysia, while
confining the northern and east coast states as well
as Sabah and Sarawak to resource-based and rural
industries, as well as tourism. A National Physical
Development Plan is therefore an integral part of
the IDDP to ensure a balanced physical development
of the whole country in terms of the allocation of
resources between regions, and a sustainable
development in relation to land-use and exploitation
of natural resources/and environmental balance.
 
5.3 Distribution under the Income Doubling and
Distribution Plan.
 
The aim of the distribution component of the IDDP is
to remove racial income imbalance and the objective
simply is to achieve equality in income between the
Bumiputeras and non-Bumiputeras (Figure 9).
Eradicating absolute poverty and changing the
employment and ownership structure should be seen as
the means to achieving this end as labour
(employment) and capital (ownership) are the two
sources of income.  The magnitude of the effort to
achieve parity in monthly average household income
by 2000 is shown in (Figure 10). Over the 17-year
period (1970 - 87) the average monthly household
income of Peninsular Malaysia (in 1978 prices) grew
at a rate of 3.8 per cent per annum, with the
Bumiputera income growing at 4.9 per cent and the
non-Bumiputera at 2.9 per cent per annum, giving a
Bumiputera.  Non Bumiputera income disparity ratio
of 1.57 by 1987. If average monthly household income
of both ethnic groups continue to grow at the same
rate as the 1971 - 87 period up to 1990 and beyond
then racial income parity will not be achieved by
2000 and the likelihood is that racial income parity
will be attained by 2010. To achieve racial income
parity by 2000 the income of the Bumiputera will
have to grow at a higher rate than what was achieved
during the 1971 - 87 period.  Growth and development
and the doubling of income will increase the
economic opportunities for all ethnic groups in the
1991 - 2000 period. The IDDP, therefore, assumes
that the non Bumiputera average monthly household
income would grow at about 5 per cent per annum over
the 1991 - 2000 period, compared with about 3 per
cent per annum during the 1971 - 87 period, raising
their average monthly household income to about
M$1,720 by 2000. To achieve income parity by 2000,
Bumiputera average monthly household income would
have to grow at a rate of 9.4 per cent per annum
over the same period, compared with 4.9 per cent per
annum over the 1971 - 87 period. Overall household
income is expected to grow at 7.2 per cent per
annum. Growth in GDP is targeted to grow at about 9
per cent per annum and per capita income at 7 per
cent per annum over the same period.
 
Reaching for inter-racial income parity does not
necessarily imply that there is a neglect and lack
of concern for intra-ethnic income inequality. There
must be special interest and concern for reducing
inequality in income within each ethnic group,
especially within the Bumiputeras. If there is to be
a narrowing of income inequality within the
Bumiputera community a substantial proportion of the
resources for growth will have to be channelled
productively, to the bottom 40 per cent of the
households, especially to those households below the
poverty line income. To achieve these ends there
must be clear, consistent policy guidelines giving
emphasis to development programmes which will have
the maximum impact on the lower income groups.
 
A number of policy changes in distributional
policies will be required to be part and parcel of
the post-1990 economic policy and these, apart from
the growth enhancing policies, are as follows:
 
* Policy Thrust and Choice of Strategy: There are a
number of strategy options for development that will
need to be considered for the IDDP. While there will
be some overlapping in the strategies there are
clear biases in each strategy option. First, is the
option of a 'trickle-down' development strategy
which relies on growth for distributing the benefits
with very little intervention from the state. This
has also been dubbed as the 'indirect' development
strategy, implying that the benefits of development
are apportioned indirectly through the market
mechanism. Second is the 'direct' or 'basic needs
strategy' which puts great emphasis on government
intervention in the economy, especially in
channelling resources such as food, education,
health and water to the poor in the economy.  These
basic needs are either granted free or are heavily
subsidised and the coverage is extensive to allow
access for the maximum number of beneficiaries.
Third, is the development strategy which, while
putting much efforts on accelerating growth,
complements it with an outward-looking approach to
development with manufactured exports taking the
lead in driving the economy. There is intervention
by the government in the economy but it is of a type
which seems to be growth-enhancing rather than
growth-retarding.  Fourth, is the inward looking
import-substitution strategy option based on a deep
pessimism on the prospects for sourcing growth from
international trade. This strategy relies on setting
up manufacturing industries behind tariff walls and
growth sourced through manufactured exports is at a
minimum.  Fifth, is the 'redistribution through
growth' strategy which essentially is an
incrementalist approach to development, relying on
making progress in equity through the redistribution
of the incremental portion of growth and not on
redistributing the existing assets. Sixth, is the
more radical and socialist road to development
strategy, with the state in command and control over
the means of production and where centralised
planning plays a key role in the development of the
economy.
 
For the IDDP the development strategy ought to be
one of redistribution with growth but subject to
some modifications, some of which are summarised
below.  The emphasis should be on growth and
redistribution but with the clear proviso that it is
necessary to raise the rate of growth of the economy
before there can be any redistribution .
 
The basic thrust for distributional strategies and
policies for the post-1990 period is to accelerate
the momentum for growth and structural changes.
These strategic thrusts would accelerate the process
of intersectoral shifts in the structure of
production, expansion in educational attainment and
the skill level of the labour force and a reduction
in the growth of population. The manufacturing
sector will assume an important role in furthering
the intersectoral shifts in the structure of
production as the economy moves on to the next phase
of industrialisation. The modernisation of
agriculture will have to be accelerated to raise
further its level of productivity and as a
supporting sector of industrialisation and
development. Major reforms will be required for the
educational system together with the development of
human resources.
 
* Private Enterprise, Privatisation and the Pole of
foreign Investment: In the post 1990 period the
private enterprise should be assigned a far greater
role in the growth and development of the economy,
especially in accelerating the industrialisation
drive. There will also be greater need for raising
the level of efficiency and competitiveness of the
private sector. Foreign investment will continue to
have a role in this new industrialisation drive:
that the incorporation of foreign investment will
have to be more selective in terms of sectors and
types of assets, and that the sources of foreign
capital ought to be more diversified is a natural
policy concern to ensure the proper balance in
industrial growth. At the same time, globalising
Malaysian investment must also be encouraged with
the changing global economic conditions. The
privatisation policy will have to be continued and
it will assist in the restructuring of the economy
towards reducing the size of the public sector and
in the long-run, on raising the level of efficiency.
The social effects of privatisation, especially of
basic services, must also be given serious
consideration.
 
* Industrial Development and Small-scale and
Medium-scale Industries: The policy thrust for the
next phase of industrialisation will have to give
much emphasis on the development of small- and
medium-scale industries. There are many advantages
of small- and medium-scale industries including the
opportunities that they can provide for the
development of entrepreneurship, greater labour
intensity and the ability to use resources
efficiently. Through their greater labour intensity
and the smaller demand that they make on capital
resources they allow the lower income groups to
raise their income by engaging in manufacturing
activities. Rural small- and medium-scale industries
can also widen the sources of off-farm income of the
low-income groups in the rural areas.  Their
contribution to equitable development should not be
underestimated. Policies which tend to discriminate
against small- and medium scale enterprises will
have to be reformed.
 
* Full Employment and Utilisation of Resources:
Rapid economic growth will be necessary if the
unemployment rate is to fall and if the human
resources of the economy is to be utilised fully in
the post 1990 period. The IDDP is targeting for
'full employment' by 2000, a situation where the
level of unemployment is to be reduced to about 5
per cent. It is unlikely, on past trends, that the
level of unemployment can be reduced well below 5
per cent by 2000. Increasing the rate of growth of
employment will require adjustments to be made to
the labour market to enable it to function as
smoothly and efficiently as possible. Where there
are labour market segmentations they must be
removed.
 
* Price Stability and Monetary Policy: With the
targeted growth rate of about 9 per cent per annum
for the post-1990 decade, aggregate demand is
anticipated to exert pressure on the economy. In
anticipation of the pressure that aggregate demand
will have on the level of prices in the economy,
monetary policies will be needed to manage the price
level to ensure that there is reasonable price
stability in the economy. At the same supply
bottlenecks, should they appear, could be handled by
appropriate import liberalisation measures.
Maintaining price stability is an important part of
the IDDP not only because inflation will erode real
income but it will make it more difficult to
eradicate poverty. As the poverty line income is
pegged to the consumer price index (CPI), a rapid
increase in the CPI will in turn raise the poverty
line income.
 
* Deregulation and Liberalisation: The process of
deregulating and liberalising the economy will need
to be continued if the environment is to be more
conducive for rapid economic growth. There is still
further room for deregulating and liberalising the
economy in the land, labour and capital markets,
without jeopardising the basic need for security,
safety and meeting the needs of the law.
'Deregulation and liberalisation with a human face'
should also be the guiding principle to ensure that
they will not have adverse effects on the most
vulnerable members of the community. Liberalising
the economy should also be concerned with its
sequencing to ensure maximum benefits from
deregulation and liberalisation.
 
* Focus on the Destitutes and 'Hard-Core Poor'.
Eradicating absolute poverty would seem to be within
reach by 2000; the 'poverty income gap', the
difference between the mean income of the poor and
the poverty line in 1987 is not that enormous and
can be closed (Figures 11, 12 and 13). The post-1990
economic policy must put greater emphasis on the
hardcore poor.  Resource allocation should,
therefore, be biased to the very bottom and move
upwards to those just below the poverty line income.
This should be the 'poverty redressal rule'. Also
the idea is to narrow the inequality in income among
the poor by raising the income of the very poor.  A
working definition for the hard-core poor would
include the households in the bottom 20 per cent of
the population.
 
* De-emphasising Ownership Restructuring: The
excessive concern with the restructuring of
ownership and control will have to be redressed and
under the IDDP it should not have such commanding
status.  Ownership restructuring now must be seen to
be a means of doubling per capita income and
reaching racial income parity as an end.  Several
reasons can be cited for this change in priority and
would include the following:
 
- pursuing the restructuring of ownership as in the
past has been a deterence for some, to growth and
investment.
 
- progress has already been made to restructure the
ownership of limited companies although the
Bumiputera stake is still short of the NEP target of
at least 30 per cent. But Bumiputera control in a
number of sectors is probably higher than the
estimated 18 per cent for 1985 and could even be
higher than the 30 per cent target.
 
- foreign ownership of share capital is already well
below (about 25 per cent) the 30 per cent target and
the urgency to continue to restructure foreign
companies is no longer there.
 
- restructuring the ownership of share capital does
not add very much to raising the income of the
average Bumiputera household and putting more and
more financial resources to acquire companies would
be misplaced.
 
The last point deserves additional attention and
reinforcement. On the average households and
individuals derive a very substantial proportion of
their income from salaries and income from the
ownership of share capital, i.e., dividends, is a
very small fraction of total household income. For
lower income households at the bottom 40 per cent,
dividend income is either very negligible or
completely absent. Even in the middle class, the
middle 40 per cent, derive a very small proportion
of income from dividends. It is the rich, and
especially very rich, the top 5 or 2 per cent of the
population, who have relatively a high proportion of
their income from dividends and other assets.
Inequality in income, furthermore, is not very much
influenced by dividend income but more so by changes
in wages and salaries. If income is to be increased
more should be done to raise the income of labour.
Employment growth and raising productivity will do
more to close the income gap between the races, and
achieve better personal income distribution, than
raising the ownership of share capital.  Increasing
ownership and control will not really raise, to any
great extent, the income of the Bumiputeras.
 
But the strategy of creating a Bumiputera industrial
and commercial community requires the promotion of
entrepreneurship. This will involve the acquisition
of equity stakes by the Bumiputera entrepreneur.
Policy changes must, however, be made to the way
ownership restructuring has been approached. A
number of these changes have already been
implemented or will be implemented.  There 0are many
changes that can be detailed but the main ones would
include the following:
 
* it is preferable to have greater reliance on
incentives than quotas for ownership. A tax
incentive on ownership restructuring could be
introduced to encourage non Bumiputera-owned
companies to restructure.
 
* interference in the market for ownership and
control i.e. through takeovers and mergers, should
be kept to the minimal.
 
* satisfying ownership conditions should not be the
criteria for the granting of permission to establish
an economic enterprise or for their expansion.   a
more discriminatory approach in encouraging
companies to allocate shares to Bumiputeras will be
desirable.  The threshold for ownership
conditions'should be reserved for the large
enterprises, especially for the large companies.
 
* increasing Bumiputera ownership through the
expansion and growth of the trust agencies and
through take-overs and mergers by the major trust
agencies, such as PNB, should be de-emphasised and
the priority ought to be given to improving the
efficiency, management and productivity of the
existing companies in which the trust agencies have
an ownership stake.
 
Priority to Employment Restructuring and Human
Resources Development. As ownership restructuring is
de-emphasised, employment restructuring by
occupational levels to reflect the racial
composition of the population should have the
highest priority in the post-1990 economic policy.
Employment growth, needless to say, is vital for
this shift in policy emphasis. Increasing Bumiputera
income and reaching income parity with the
non-Bumiputeras will depend more and more on the
success of Bumiputera occupational advancement in
the manufacturing and commercial sectors.  Demand
and supply side policies should move in the
following directions:
 
 
* For ownership, it is preferable to rely more on
incentives to encourage employers to restructure
their employment pattern rather than the imposition
of rigid employment quotas.
 
* Emphasis should be placed on the supply side of
employment restructuring, with special focus on
producing educated and skilled Bumiputera manpower.
 
* Substantial investment, with the right
institutional support, will be required to raise the
productivity level of the Bumiputeras. Training and
fiscal measures to encourage the training of
Bumiputera labour will be a necessary part of
employment restructuring.
 
* Employers in large establishments should be
required to have long-term plans for Bumiputera
occupational advancement.
 
New Thrusts for Trust Agencies. Major changes will
have to be made to the role of public enterprises,
especially that of the trust agencies, in the
economy. Many changes have already been implemented
but more detailed work is required for a major
reform of public enterprises. Privatisation,
divestiture and closures are some of the approaches
for having a more lean, efficient and manageable
public sector. Central to the change is to shift the
focus of these enterprises from ownership
restructuring tasks to raising the productivity of
the employees and efficiency of the enterprises and
in assisting Bumiputera entrepreneurial development.
Particularly important will be the role of
Permodalan Nasional Berhad (PNB), PERNAS and the
SEDCs.
 
Slowing Population Growth. Population growth have
and will continue to have an influence on the level
of per capita income and the size distribution of
income. There is evidence which suggests that
countries which have a high rate of population
growth also has a poor record in the distribution of
income. Low income households tend to have larger
families while the size of the households tends to
decline with rising levels of income. Population
policy should be one of supporting for slower growth
and should not be pronatalist, if it is to
contribute to the doubling of the per capita income
of the country and to closing the racial income
imbalances and to improve the distribution of
income. The new population strategy should push the
population growth rate to well below the 2.6 per
cent assumed in the IDDP so that the income doubling
and ethnic income parity may be achieved at a lower
rate of growth of EDP than the 9.8 per cent required
per annum over the ten year period.
 
 
6. CONCLUSION
 
Despite great worries over the likely effects of the
NEP on the growth of the- economy and predictions of
failures, the Malaysian economy managed to record a
commendable track record of growth and development.
In the sixties, a decade marked by little explicit
concern with equity, the economy grew at a rate of
about 6 per cent per annum, increasing to almost 8
per cent per annum during the seventies, the heyday
of the NEP, and about 6 per cent for the eighties.
The level of absolute poverty has declined and
inequality in income has narrowed. Progress has been
made in reducing some of the glaring racial economic
imbalances in income, employment and ownership of
wealth but some of the targets and objectives of the
NEP will not be reached by 1990. These equity
achievements have not been without 'costs' and there
will have to be weighed carefully and the lessons
that have been learned will have to be put to good
use for the post-1990 economic policy. The IDDP,
1990 - 2000, has set a target for the doubling of
per capita income and for reaching racial income
parity of average income by 2000. These may appear
to be ambitious development targets but with the
necessary conditions they can be attained.
Sustaining growth and making further changes to
development policies to accelerate growth will be
required if the IDDP targets are to be achieved.
 
Prospects for the long-term growth of the Malaysian
economy are considered by many experts as good. The
baseline projection for Malaysia by Onishi, a
Japanese scholar who operates a huge world economic
model, forecasts a long-term growth rate of around 7
per cent annum up to the year 2000, while his
alternative projections ("optimistic" or
"pessimistic") adds or subtracts an average of about
1 per cent from the base trend. Shinohara, another
eminent Japanese economist, projected that at a
growth rate of 4 per cent per annum, Malaysia's real
GDP per capita should reach US$3,638 by the end of
the ten-year period. If Malaysia can achieve a more
efficient management of the economy at the macro-
and micro-levels, through reductions in the ICOR
(incrementals capital-output ratio which measures
the efficiency in the utilisation of capital) and
improving the contribution of the "third factor"
(namely, technology, innovation, skills and
entrepreneurship, etc), by MIER calculations, an
additional 1.5 - 2.0 per cent may be added to the
annual growth of output as projected above, thus
approaching the long-term growth target of the
income doubling plan.  Malaysia has to undertake the
necessary structural adjustments in order to achieve
a higher rate of industrialisation if it wants to
attain this GDP growth rate and reach NIC status by
the year 2000, if not earlier, depending on the
success of global restructuring and the economic and
political environment during the period.
 
It is indeed true that the objective of accelerating
economic growth as proposed in the IDDP is not the
status of a newly industrialised country per se, but
to create the conditions for us to increase overall
welfare of the Malaysian people. And it is without
doubt that the process of building a national
society does not rest on economic policy alone. But,
the post-1990 policy represents a significant new
point of departure towards that eventual goal.