Pak Lah's economic reckoning - Wall Street Journal

From the Wall Street Asia Journal

Opposition leader Datuk Seri Anwar Ibrahim announced this week that he has enough parliamentary support to unseat the current government, led by Prime Minister Datuk Seri Abdullah Ahmad Badawi. If he does, Abdullah's lacklustre economic management will be largely to blame.

The prime minister has not introduced any substantive reforms during his nearly five years in office, preferring to rely instead on opening up the government purse. Under the Ninth Malaysia Plan announced in 2005, he expanded public-sector spending to RM200 billion annually from RM160 billion. In his Midterm Plan Review this year, he increased this outlay to RM240 billion. The national debt now stands at RM285 billion, up from RM192 billion in 2004. The official fiscal deficit has risen to 4.8% of GDP this year, from 3.2% last year. Revenue is being spent faster than it is coming in.

It's hard to argue that these outlays have served the broad public interest. Much of the funding has been channelled to elites in the majority Malay community, under the country's pro-Malay affirmation action programme. That has created discontent with many Malay who don't see the full benefits of the programme, and among the minority Chinese and Indians, who are excluded from it altogether.

Abdullah's stewardship has had a real impact on the economy. Capital flight has risen sharply; Malaysian investment abroad now exceeds inward foreign investment. The Kuala Lumpur stock exchange has lost almost one-fifth of its value this year to date. Malaysia's currency, the ringgit, saw its biggest one-month loss last month since the end of the dollar peg in 2005. Although GDP growth has averaged a robust 5% annual growth under Abdullah, that record is now under threat. Inflation reached a record 8.5% this summer. Job creation has reached record lows, as unemployment, particularly among young majority Malays, remains high. Ironically, only the opposition-led state governments are attracting new foreign investment — and without the federal government's help, no less.

Abdullah's 2004 attempts to promote growth and investment — such as through the promotion of the biotechnology and agricultural industries — have failed. He also fumbled discussions with the United States on a free trade agreement, which have now stalled. What Malaysia really needs is education reform and the liberalisation of its labour markets to improve its economic competitiveness.

The political opposition, in the form of Anwar and his Pakatan Rakyat coalition, have seized on these issues. They have promised to root out corruption and to implement a new economic policy to address the concerns of all ethnic communities in Malaysia. Their platform aims to move beyond populist spending to introduce structural reforms in government procurement programmes and in the management of government-linked companies.

When Abdullah assumed office in 2004, he inherited an economy in need of structural reform. Malaysians have had to pay for his poor stewardship through higher prices, stagnating wages and growing private sector debt. Soon, Abdullah may have to pay the political price for that record.

Scathing attack indeed, but there is a big element of truth in it. I wonder how much longer he can hold out?