VZCZCXRO8470
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1692/01 3450806
ZNR UUUUU ZZH
R 110806Z DEC 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 0349
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1538
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001692 
 
SIPDIS 
 
STATE PASS USTR - WEISEL AND BELL 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
USDOC FOR 4430/MAC/EAP/J.BAKER 
SINGAPORE PASS TO S.BAKER 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV MY
 
SUBJECT:  MALAYSIAN RACIAL ECONOMIC PREFERENCES CRITIQUED AT 
CONFERENCE IN KL 
 
REF: 2006 KUALA LUMPUR 0930; 
 
      2006 KUALA LUMPUR 1942 
 
¶1. (SBU) Summary:  Malaysia's race-based economic preferences were 
roundly criticized at the annual National Economic Outlook 
Conference hosted by the Malaysian Institute of Economic Research 
(MIER). In the keynote address, the Crown Prince of the State of 
Perak called for national unity and pragmatic economic policies 
designed to improve the country's competitiveness, essentially a 
polite rejection of race-based policies. Stronger attacks on 
Malaysia's racial preferences were made by a former World Bank 
economist and an Australian academic who argued that incentives in 
Malaysia's economy were becoming increasingly distorted, leading to 
a loss of competitiveness.  While no one expects the government of 
Malaysia to undertake policy change in this sensitive area in the 
near term, it is notable that a government-funded think tank 
provided the forum for this much needed debate.  End Summary. 
 
 
CROWN PRINCE OF STATE OF PERAK CALLS FOR CHANGE 
--------------------------------------------- -- 
 
¶2.  (U) In his keynote address the Crown Prince of the State of 
Perak called for "pragmatism and fairness," a subtle attack on the 
government's current policies in terms of both its economic agenda 
and its divisive racial preferences.  On the economic front, he 
described Malaysia as "squeezed between the low-cost economies of 
China and Vietnam and the high-technology economies of Japan and 
South Korea," and called for "the most competitive, innovative and 
flexible responses." 
 
¶3. (U) He cited the oft-repeated mantra that Malaysia needs to move 
"up the technological ladder"; however, a far greater part of his 
address focused on social and human capital, which he said were 
essential to development.  He said Malaysia must foster networks 
among its different ethnic, religious, and territorial groups.  He 
called for "increasing opportunities for bonding and bridging in 
residential neighborhoods, classrooms and the workplace, all with 
the understanding that more cultural mix is better." 
 
¶4. (U) Alluding to the ongoing brain drain, the Crown Prince asked, 
"Can entrepreneurs, scientists, and technologists be nurtured 
without an enabling political, social, economic and cultural 
environment?  Can they flourish in the presence of perverse 
incentives and disincentives? ...There are countries today whose 
citizens are highly educated and whose scientists and engineers are 
at the leading edge in their fields but who want nothing more than 
to leave their countries.  Countries must change in line with the 
aspirations of their citizens or they risk losing their best and 
brightest." 
 
 
MEASURING WEALTH BY RACE 
------------------------ 
 
¶5.  (SBU) Lim Teck Ghee, a leading economic analyst and former World 
Bank staffer, calmly explained his earlier study on distribution of 
wealth among Malaysia's racial groups (reftels) which concluded that 
the wealth of ethnic Malays had already exceeded the government's 
targets.  His conclusion effectively challenged the stated basis of 
the government's racial preference policies. Lim also briefly 
reviewed several other studies that had reached similar conclusions. 
Two studies from the late 1980s suggested that that the lower 
classes bore the highest social costs of the racial preference 
policies, while a small group among the upper classes enjoyed the 
benefits.  Two other studies, one from 1989 and another from 2002, 
concluded that the government's wealth targets for ethnic Malays had 
been reached or exceeded, as did Lim's own 2006 study. 
 
¶6. (U) Lim reviewed some of the findings and recommendations of his 
earlier study on the impact of Malaysia's racial policies on the 
economy and society. First, he pointed out that the government holds 
more than a third of publicly traded corporate equity, but that 
government-controlled companies reflected little entrepreneurial or 
manufacturing capacity.  He recommended that government-owned 
entities be managed by competent professionals with expertise in the 
business of the company under their charge.  Senior management 
positions should not be determined on the basis of race. 
 
KUALA LUMP 00001692  002 OF 003 
 
 
 
¶7. (U) Second, he pointed out that the current practice of 
distributing 30 percent of initial public offerings (IPOs) to 
individual ethnic Malays generally benefited only an elite few who 
often divested the shares immediately for huge profits.  Lim 
recommended that Malay IPO allocations not go to individuals unless 
a mechanism could be introduced to ensure that the beneficiaries 
played a prominent role in the management of these companies.  One 
option would be to make such allocations to existing trust agencies 
for Malays and to community-based trust agencies for Malaysian 
Indians and residents of Malaysian Borneo.  [Note:  among these two 
groups are some of Malaysia's poorest people.  End note.] 
 
¶8. (U) Third, Lim said GOM regulations and policies were stymieing 
entrepreneurial development and hindering domestic and foreign 
investment.  Ethnic preferences undermined entrepreneurial endeavors 
and the creation of a competitive economic environment.  The GOM 
could better achieve its goals through capacity building efforts 
such as education and skills training rather than through forced 
equity restructuring. 
 
 
ECONOMIC FREEDOM: FROM 9TH TO 60TH PLACE 
---------------------------------------- 
 
¶9. (U) More Malaysian feathers were ruffled when Wolfgang Kasper, 
Emeritus Professor of Economics, University of New South Wales, 
Australia, displayed graphs demonstrating a direct correlation 
between economic freedom and prosperity and cited the Cato 
Institute's "Economic Freedom of the World" 2007 Annual Report which 
ranked Malaysia as 9th most free country in 1990 but as 60th in 
¶2005.  Kasper described Malaysia as having reached that halfway 
point in its development and outlined the elements of the rest of 
the journey: secure property rights, free markets, and a small, 
rule-bound, non-corrupt government.  He summed up his analysis of 
Malaysia as follows:  "The politicization of economic life leads to 
stagnation and social convulsion, a prospect that only the 
unrealistic and naive can face with self-satisfied complacency.  It 
seems to me that it would be much more naive and unrealistic to 
tolerate the cancer of crony capitalism and heavy reliance on 
pervasive, top-down bureaucratic controls and big government.... It 
is the big political challenge of the present generation of decision 
makers to abandon short-sighted, selfish rent-seeking in order to 
ensure that the vision of the developed-country shore ahead can be 
attained." 
 
 
RESPONSES FROM THE AUDIENCE 
--------------------------- 
¶10. (U) In response to Lim's presentation, a number of members of 
the audience spoke out angrily, including a member of the 
Government's Economic Planning Unit (EPU) who resorted to a personal 
attack on Lim rather than on the points he raised.  Another critic 
in the audience, Ms. Aminah binti Pit Abdul Rahman who had been a 
government employee for 23 years, became visibly agitated and 
reminded the audience that ethnic Malays comprised 60 percent of the 
population; therefore, she argued (or rather shouted) that the 
government targets should be raised from 30 percent to 60 or 70 
percent.  Some respondents in the audience were upset about Kasper's 
comments, with one indignantly noting that Malaysia should be 
praised for progress achieved. 
 
 
¶11. (SBU) Comment: In the run-up to national elections, due by April 
2009 but expected before April 2008, there has been increased 
attention paid to the GOM's economic and social policies in general 
and its 37-year old race-based economic preference policies in 
particular. There is widespread concern among non-Malays that these 
policies are marginalizing them and therefore breaking down 
Malaysia's social cohesion.  Many of the country's best and 
brightest non-Malay youth are migrating, perceiving little long-term 
hope of being treated as anything but second-class citizens in 
Malaysia. Many ethnic Malays, on the other hand, maintain a more 
defensive posture, apparently convinced of the rhetoric that they 
are more deserving of special protections because of their past 
disadvantage.  Their outbursts at the conference in response to 
criticism of the status quo [except, of course, that of the Crown 
Prince of Perak] were more emotional than pragmatic. Despite a 
 
KUALA LUMP 00001692  003 OF 003 
 
 
handful of such outbursts, the overwhelming majority of the audience 
remained silent.  At lunch a Malay who had been government employee 
for many years expressed gratitude for Kasper's presentation on 
economic freedom, telling econoff, "We need foreigners to say these 
things."  While little change can be expected in the near term, the 
biggest news is that these kinds of issues can be discussed at all 
in a conference hosted by a government-funded think tank.  The 
conference would appear to be another example where Prime Minister 
Badawi's government is ready to allow more open debate as a first 
step toward possible revisions in policy at a future date when it 
becomes politically feasible to do so. 
 
KEITH