Public policy in asia

Public Policy in Asia


Public Policy in Asia
Implications for Business
and Government
Edited by
Mukul G. Asher, David Newman,
and Thomas P. Snyder

QUORUM BOOKS
Westport, Connecticut • London


Library of Congress Cataloging-in-Publication Data
Public policy in Asia : implications for business and government / edited by Mukul G. Asher,
David Newman, Thomas P. Snyder.
p. cm.
Includes bibliographical references and index.
ISBN 1–56720–432–5 (alk. paper)
1. Asia—Economic policy. 2. Policy sciences—Asia. I. Asher, Mukul G. II. Newman,
David, 1956.
HC412.P83 2002
338.95—dc21
2001016129
British Library Cataloguing in Publication Data is available.
Copyright ᭧ 2002 by Mukul G. Asher, David Newman, and Thomas P. Snyder
All rights reserved. No portion of this book may be
reproduced, by any process or technique, without
the express written consent of the publisher.
Library of Congress Catalog Card Number: 2001016129

ISBN: 1–56720–432–5
First published in 2002
Quorum Books, 88 Post Road West, Westport, CT 06881
An imprint of Greenwood Publishing Group, Inc.
www.quorumbooks.com
Printed in the United States of America
TM

The paper used in this book complies with the
Permanent Paper Standard issued by the National
Information Standards Organization (Z39.48–1984).
10 9 8 7 6 5 4 3 2 1


To Radha, Andrew, Benjamin, Trisha, and Janet


Contents

Preface
1.

Introduction: The Challenge of Policy Studies in Asia
Thomas P. Snyder, David Newman, and Mukul G. Asher

I. Growth, Income Security, and Fiscal Reform
2.

3.

4.

5.

6.

7.

ix
1

9

Economic Growth and Income Inequality: The Malaysian
Experience
Donald R. Snodgrass

11

Economic Growth and Income Inequality: The Korean and
Thai Experiences
Nanak Kakwani and Hyun H. Son

33

Aging Populations and Income Security: The Challenges in
East Asia
Robert L. Clark

61

Aging Populations and Income Security: A Framework for
Analysis and Action
G. Shantakumar

81

Globalization and Fiscal Policy: Rationale for Reform in
Southeast Asia
Mukul G. Asher

93

Globalization and Fiscal Policy: Tax Reform in Japan
Hiromitsu Ishi

121


viii

Contents

II. Governance and Management Reform

143

8.

Globalization and Economic Management

Anwar Shah

145

9.

Learning and Innovation in Public Institutions: Lessons from
Singapore
Tan Tay Keong and Khoo Boon Hui

175

10.

Good Governance: The Role of the United Nations
Gambhir Bhatta

193

11.

Good Governance: The Role of Legal Institutions
Annie de Roo and Robert Jagtenberg

217

III. Technology, Innovation, and the Role of Government

239

12.

Science, Technology, and Innovation: Issues and Rationales
Mark Dodgson

241

13.

National Technology Policy: The Singapore Experience
Koh Ai Tee and Koh How Eng

265

14.

National Technology Policy: The Korean Experience
Linsu Kim

283

IV. Environmental Policy and Management

295

15.

Integrated Environmental Assessment
Colin Kirkpatrick

297

16.

Environmental Valuation
Jack L. Knetsch

311

Index

331

About the Contributors

337


Preface

Public policy and policy studies is a growth industry around the world, and Asia
is no exception. While the economic boom of the 1990s suggested to some that
Asia was somehow removed from any economic budget constraint, post-crisis
Asia has awakened to a new set of realities: political choice involves trade-offs
between alternatives; individuals within particular countries have different propensities to trade off among alternatives, engendering decisions with a political
element; an increasingly politicized environment raises questions of legitimacy
with respect to process; and a new economic reality of limited budgets constrains
government efforts to sweeten difficult decisions. These environmental changes
have attracted the attention of policy analysts from both within and outside the
region internationalizing the field of policy studies.

Globalization, the growth of international institutions and transnational actors,
and, particularly for those of us in Asia, the Asian economic crisis have internationalized policy studies and put policy studies on the map in Asia in the past
decade. In the United States in recent years, public policy programs have embarked on a new round of expansion in international and comparative policy
studies. While the Association for Public Policy Analysis and Management
(APPAM) editorial board is still drawn exclusively from the United States, it
does have at least two international institutional members (the National University of Singapore and Keio University in Japan), and non-APPAM member
schools have been created in Korea (as an offshoot of the Korean Development
Institute), in Argentina (Universidad Torcuato di Tella), and in England (University College London School of Public Policy). The trend in the future will
be to look cross-nationally at best policy practices and examine which are importable to one’s own circumstances. However, the art of lesson drawing is not
easy, and neither is implementation of strategies, however appropriate. Indige-


x

Preface

nous research capability, policy entrepreneurship, and sustained effort remain
indispensable for successful lesson drawing.
Our goal in this volume, in part, is to bring established international and
regional experts together to examine several of the most pressing concerns facing Asia. In doing so, we have incurred a series of debts to numerous individuals
and institutions. We would like to thank Singapore Pools, the Lien Foundation,
the Lee Foundation, and the International Development Research Centre for
financial support related to this project.
We would like to express our appreciation to the National University of Singapore’s Public Policy Programme and its director, Ong Jin Hui, for providing
an intellectually stimulating environment, which has made projects such as this
possible. In Singapore we would like to thank Agnes Tan and Deborah Chew
for their administrative assistance with the details associated with this effort.
The contributors to this volume truly deserve the credit for it. They labored
under artificially tight deadlines and our requests for clarification and in some
instances elucidation, especially when their knowledge exceeded our understanding. We thank them for their contribution and understanding. It was a pleasure

to work with each and every one of them.
We gratefully thank Usha Sritharan and Brenda Nicole Lim Mei Lin for their
assistance in preparing the manuscript. The two of them responded with good
spirit to having three bosses insisting on incompatible changes. Juliana Bte Ali
and Josephine Chiu also deserve our appreciation for liberating Usha’s time. As
always, we remain responsible for any errors.


Chapter 1

Introduction: The Challenge
of Policy Studies in Asia
Thomas P. Snyder, David Newman,
and Mukul G. Asher

Much of East Asia and Southeast Asia has seen dramatic changes over the past
two decades. These changes provide an excellent laboratory for exploring and
examining our understanding of social, economic, and political institutions and
theories. The region also provides an excellent opportunity to apply theories and
concepts to improve policy decisions and the lives of the people. It is the objective of this book to aid in these endeavors.
EAST ASIA AND SOUTHEAST ASIA—DIVERSITY AND
CHANGE
Over the past two decades many countries in East Asia and Southeast Asia
have experienced rapid growth. At the same time growth seems to have passed
over other countries where citizens barely eke out a daily existence. At one end
of the spectrum is Japan, which modernized rapidly after World War II, and by
any standards is a fully developed country. Then there are the Asian Tigers—
Korea, Taiwan, Hong Kong, and Singapore—which grew rapidly in the 1980s
and 1990s and are on the verge of or have achieved developed status. Then
there are Malaysia and Thailand, and to a lesser degree China, Indonesia, and

the Philippines, which have begun to develop but still have a long way to go;
and at the bottom of the development ladder are Cambodia, Laos, Myanmar,
and Vietnam, which are essentially undeveloped countries.
Just as the level of development varies widely in East Asia and Southeast
Asia, so do development policies and practices. Some countries have relied
largely on internal savings and investment, such as Japan and Korea, while other
countries have relied heavily on foreign investment, such as Singapore. In some
countries development has focused on trade, while in others it has focused on


2

Public Policy in Asia

increased internal demand. The countries have also varied widely in their policies toward education and the adoption and diffusion of new technology. No
clear-cut development model has emerged that meets the needs of all the
countries in the region.
Diversity in the region also extends beyond growth, development, and economics. The size of the countries ranges from two of the largest countries in
the world, China and Indonesia, with over 1 billion and 200 million people,
respectively, to Singapore, a city-state with only 4 million people. The region
has some of the most densely populated areas of the world in Java, Japan, and
coastal China, and some of the most sparsely populated areas in Borneo, Laos,
and Western China. The countries of the region also vary greatly along ethnic
lines. China and Japan are relatively homogeneous, while Indonesia, Malaysia,
and Singapore are ethnically diverse. Politically the countries run the spectrum
from open democracies in countries such as the Philippines, Taiwan, and Thailand to authoritarian states in countries such as China, Laos, Myanmar, and
Vietnam.
THE EMERGENCE OF POLICY ANALYSIS IN ASIA
With the growth in East Asia and Southeast Asia over the past two decades
and the diversity of political, social, cultural, and economic institutions, the

region is an ideal place for policy analysts and social scientists to examine and
verify, as well as to apply, the theories and principles that underlie contemporary
policy analysis. The region is thus a natural place to examine the determinants
of growth—why growth occurs and why certain policies work in one area and
not in others. The region is also a natural place to look at the consequences of
growth—who benefits from growth and who gets left behind, and what can be
done to improve the fate of those who get left behind.
Much of social science theory has evolved in the West, and there are questions
about the universality and cultural/contextual relevancy of the theory in the rest
of the world. The issues of verification and applicability are just starting to
emerge in both the traditional academic disciplines, such as economics and political science, and in policy analysis circles. Much of the research on Asia prior
to this decade focused on comparative studies and area/regional studies. Usually
these fields have had weak links to traditional academic disciplines in the social
sciences and have often focused on descriptive and cultural analysis. In recent
years the lines between comparative analysis and traditional academic disciplines
have begun to merge. Comparative analysis is becoming more formal and dependent on the theories and foundations of the traditional academic disciplines,
and the academic disciplines are becoming more cognizant of Asia and the rest
of the world in developing the theories and principles that underlie their fields.
The primary objective of this book is to improve policy analysis in Asia by
bridging the gap between theory and practice. In some of the chapters, the focus
is on the application of theory to problems in the regions. Chapter 4 on aging


The Challenge of Policy Studies in Asia

3

by Robert L. Clark, Chapter 6 on globalization and fiscal policy by Mukul G.
Asher, and Chapter 8 on globalization and fiscal management by Anwar Shah
are in this vein. Other chapters, such as Chapters 2 and 3 on income distribution

by Donald R. Snodgrass and Nanak Kakwani and Hyun H. Son, and Chapter
16 on environmental valuation by Jack L. Knetsch, focus more on verification
of theories. The hope is that the book will improve the quality of policy decisions by bringing a better understanding of the issues that effect East Asia and
Southeast Asia.
The chapters in the book are arranged into four parts that reflect major areas
of policy interest in the region: Part I focuses on growth, income security, and
fiscal reform. Part II focuses on issues of governance and management. Part III
focuses on technology policy. Part IV focuses on environmental policy.
GROWTH, INCOME SECURITY, AND FISCAL REFORM
While growth and development improve the well-being of most members of
society, there are many who are left behind. Part I of the book focuses on three
issues in this area: (1) the impact of growth and development on the distribution
of incomes and policy to deal with the poor; (2) the aging of populations that
inevitably occurs with growth and development and the policies to deal with
old age security; and (3) fiscal policies used to finance the social and other
services required in any developed society.
In Chapter 2 Donald R. Snodgrass looks at the impact of growth on income
distribution in Malaysia, and in Chapter 3 Nanak Kakwani and Hyun H. Son
examine the impact of growth on income distribution in Korea and Thailand.
Snodgrass examines the Malaysian practice of giving preferential treatment to
the Bumiputra, or indigenous Malay, over the ethnic Chinese, who controlled
98 percent of the wealth in Malaysia at independence. In particular, he examines
the long-held belief that there is a trade-off between equity (redistribution of
income) and efficiency (growth) and why it seems to not have occurred in
Malaysia. Kakwani and Son examine the hypothesis that income equality gets
worse before it improves as a country grows. In Korea they find that income
distribution was consistent with this hypothesis, and in Thailand that income
inequality had increased in the 1980s and had just started to decrease prior to
the financial crisis in 1997. They also look at differences in measuring inequality
based on income and consumption, and the role of savings on income distribution. In Korea they find that the savings effect outweighs the distribution

effect, and that poverty based on consumption is greater than poverty based on
income, and in Thailand that the distribution effect dominates the savings effect
and that income-based poverty is higher.
In Chapters 4 and 5 Robert L. Clark and G. Shantakumar examine the problems of aging populations. Clark starts by looking at the demographic trends in
Asia as countries develop and fertility rates decline. He finds that the pay-asyou-go retirement systems found in most countries are inadequate to meet the


4

Public Policy in Asia

needs of the elderly, and that major reforms are required. He identifies key areas
that need attention, such as the retirement age, coverage, investment policies
and performance, the form of benefits, and administrative costs. Shantakumar
looks at the issues of managing programs for the elderly. He identifies the need
to integrate health care and income security programs and addresses a proposed
methodology for dealing with management, policy formulation, and coordination
issues.
In Chapters 6 and 7 Mukul G. Asher and Hiromitsu Ishi examine issues of
fiscal policy and reform. In most Asian countries growth has come with increased trade and the opening up of domestic economies. This means that the
countries are susceptible to global markets and conditions. Asher looks at the
impact of the new economic structure on tax policies and the ability of countries
to finance public services and infrastructure. In particular he examines the impact
of globalization on tax structures and local autonomy, privatization, and the role
of the public sector, and the need for accountability and transparency. Ishi examines income tax reform in Japan. He starts by exploring the impetus for
change—in the late 1980s and early 1990s, globalization, a more open economy,
and changes in tax policy in the United States and Europe; in the mid-1990s,
the need for Japan to be competitive in world markets; and in the late 1990s,
the need to deal with the recession that hit the country. He then examines the
ability (or inability) of the government to implement tax reform, which reinforces the importance of the political process and institutions in the formulation

of public policy.
GOVERNANCE AND MANAGEMENT REFORM
With growth and development come new responsibilities and a new role for
government. The chapters in this section look at the role of government in
economic management, organizational/management reform, the role of international institutions in political reform, and the role of law in society.
In Chapter 8 Anwar Shah examines the governance structure that is required
in newly developed and developing countries to manage the economy. He identifies the need for governments to move away from a command and control
mentality to one of serving the citizens. Consequently, he sees accountability as
the key factor in governmental reform and decentralization as a logical way to
establish accountability.
In Chapter 9 Tan Tay Keong and Khoo Boon Hui look at how to initiate
public sector reform in the face of bureaucratic intransigence. Adopting the
learning organization framework of Peter Senge, they first examine the efforts
and experience of the Singapore Police Force to alter long-entrenched notions
of hierarchy and accountability within the force. While their case study is one
of local success, the chapter highlights the degree of concerted effort necessary
to reform more archaic institutions in less-wealthy countries with lessenlightened management.


The Challenge of Policy Studies in Asia

5

In Chapter 10 Gambhir Bhatta looks at the role of the United Nations (UN)
and its sister organizations in promoting good governance. He traces the history
of the UN in overseeing development activities and the relegation of responsibilities between the UN proper and the Bretton Woods organizations. He then
identifies philosophical differences in the various aid organizations and their
approaches and practices toward the promotion of good governance. In particular
he identifies an increasing awareness by aid organizations of the role of nongovernmental organizations (NGOs) in good governance and of the need to
become proactive in promoting governmental reform.

In Chapter 11 Annie de Roo and Robert Jagtenberg examine the role of law
in political and economic development. They identify fundamental and cultural
differences in the approach and use of law between the East and the West. They
trace the development of the Western tradition of rule of law as a way of
protecting business and consumer interests in economic transactions and establishing the limits of government power. They then trace the development of the
Eastern tradition of rule by law, where laws are established to protect the hierarchal structure of society and the supremacy of government. They conclude
that the traditions of rule by law are inadequate to deal with the decentralized
decision structure of a market economy and are an impediment to economic
reform and good governance.
TECHNOLOGY, INNOVATION, AND THE ROLE OF
GOVERNMENT
Growth and development depend heavily on increasing the productivity of a
country’s citizens. The role of government in promoting the creation and diffusion of technology and innovation varies widely across countries. Some countries take a very laissez-faire approach and leave technology development and
use to the private sector, while others have very proactive government policies.
In Chapter 12 Mark Dodgson traces the various roles that Asian countries have
played in promoting technology and innovation, with a particular focus on
China. While government expenditures have generally been smaller in Asia than
in the West, they have involved direct financing of government institutes and
the direct promotion of specific technology—often with mixed results. Private
expenditures on research development are virtually non-existent in Asia, and
multinational corporations (MNCs) are good at technology diffusion but not at
technology creation. All this points to the West as the primary source of new
technology and innovation, with Asia always lagging behind.
In Chapter 13 Koh Ai Tee and Koh How Eng examine technology policy in
Singapore, and in Chapter 14 Linsu Kim looks at technology policy in Korea.
Singapore is an interesting example in that it relied heavily on MNCs in its
development strategies and thus had to develop a large governmental structure
to promote technology development and creation. Koh and Koh look at the
philosophy underlying the government’s efforts and the institutions that Singa-

6

Public Policy in Asia

pore established to try to reduce the gap between them and the West. Korea is
a country with little direct foreign investment, so it could not rely on foreign
sources for either the diffusion or the creation of new technology and innovation.
Kim traces the large government role in the identification and use of technologies and the policy biases between small and large firms.

ENVIRONMENTAL POLICY AND MANAGEMENT
Environmental policy has generally been lax in Asia and not a high priority
of governments. In Chapter 15 Colin Kirkpatrick looks at methods of environmental assessment, and in Chapter 16 Jack L. Knetsch looks at the issues involved in environmental valuation. Kirkpatrick examines environmental policy
from a broader perspective, feeling that the setting of environmental policies in
isolation leads to doomed policies. He identifies the need for a multidimensional
assessment of not just health and environmental impacts, but also social and
economic impacts. He also identifies the need to balance this assessment at the
project level with assessment at the planning/strategic level. Knetsch identifies
the shortcomings of traditional methods of valuing environmental damages. He
feels that policy makers often get the wrong answer to the wrong question. He
feels that their persistence in trying to ascertain the public’s value of environmental damages is useless, since it depends on context. He advocates the use
of damage schedules that he applies to the setting of environmental policies to
protect Phangnga Bay in Thailand.

THE FUTURE OF PUBLIC POLICY IN ASIA
The prospects for good public policy in Asia are going to depend upon several
factors—better analysis, transparent and legitimate decision-making processes,
and a more open discussion of issues.
The first step to better public policies is better analysis. This means better
research, both in academia and in government. For academics this means consideration of Asia in the development and verification of theories and principles.

For governments this means civil servants with a basic understanding of theories
and principles, and a working environment where they can provide impartial
analysis.
The second step is a transparent and legitimate decision-making process.
Analysis alone is not going to provide the right answers; there are no right
answers to policy questions. Each policy has it strengths and weaknesses. Each
policy will impact on different segments of society differently. The legitimacy
of a policy depends upon the legitimacy of the decision-making process. All
affected parties need to have access to the decision-making process, and their
opinions need to be considered—either directly or indirectly. Good public policy
needs to reflect the needs and desires of the public. The public also needs to


The Challenge of Policy Studies in Asia

7

have confidence in the decision-making process, which requires that it be open
and transparent.
The third step is open discussion of issues. The public cannot express its
opinions unless it has information. The public needs to be given basic facts
about issues. Issues need to be discussed and scrutinized. True and rational
decisions come only from challenging and defending principles, theories, and
positions. Without public scrutiny, knowledge and policy do not advance.
The hope of this book is to aid in the advancement of good public policy.
Some of the chapters provide the foundations for analysis by presenting facts
and theories. Hopefully this will lead to a more informed public, as well as
better-informed government officials and academic scrutiny. Other chapters discuss the reforms of the political and institutional processes that are needed for
rational policies. Hopefully this will lead to better institutions and practices for
making public policies.

Part I

Growth, Income Security,
and Fiscal Reform


This page intentionally blank


Chapter 2

Economic Growth and Income
Inequality: The Malaysian Experience
Donald R. Snodgrass

Malaysia is an important example of redistribution with growth in an ethnically
heterogeneous society because it achieved substantial redistribution of both income and socioeconomic opportunity while maintaining one of the world’s highest rates of economic growth between 1970 and 1997. Ethnically diverse
countries generally do less well in economic development than countries with
more homogeneous populations. The main reason is probably that heterogeneity
promotes conflict, which at its worst (as witnessed in several countries recently)
can involve widespread death and destruction. Even when conflict does not
escalate that far, controversies over how resources are to be shared are more
likely to distract heterogeneous societies from the task of wealth accumulation
than is the case for countries with ethnically homogeneous populations. In 1965–
1990 the 56 developing countries that I classify as ethnically heterogeneous
averaged real per capita GNP (gross national product) growth of 2.1 percent a
year, compared to 4.5 percent on average for the 47 countries classified as
ethnically homogeneous.1 Of 14 countries that managed to raise per capita income at 4 percent or better in 1965–1990, only four (Botswana, Indonesia,

Thailand, and Malaysia) were ethnically heterogeneous. At the other end of the
growth scale, 33 countries failed to raise per capita GNP between 1965 and
1990; 25 of these were ethnically heterogeneous. When other determinants of
economic growth rates are taken into account, ethnic heterogeneity reduces the
annual growth rate by one percentage point on average.2 Malaysia, one of the
10 fastest-growing economies in 1965–1990, serves as a rare real-world example
of the redistribution with growth process described and advocated by some
World Bank economists in the mid-1970s (Chenery et al. 1974).3
Malaysia is the veritable model of an ethnically heterogeneous or plural society.4 With few (but growing) exceptions, Peninsular Malaysians regard them-


12

Growth, Income Security, and Fiscal Reform

selves unambiguously as Malay Muslims, Chinese, or Indians.5 In Sabah and
Sarawak, the scene is complicated by the presence of several indigenous groups,
not all of which are Muslim. In the 1970s the term Bumiputra was introduced
to suggest a unity of interest between the Malays and other groups regarded as
indigenous, but that unity has not always existed in practice. For more than four
decades, national politics has been dominated by parties that are either ethnically
exclusive or that primarily represent the interest of a particular ethnic group.
Although the ruling Alliance and Barisan Nasional coalitions have included
many parties that represent other ethnic groups, they have always been dominated by the United Malays National Organization (UMNO), the preeminent
party of the Malays. The persistence of political representation based on ethnicity has disappointed political scientists who expected class eventually to replace
ethnicity as the main basis for interpersonal distinction and political representation.
Malaysia’s plural society was created by immigration from China and India
during the 19th and early 20th centuries.6 The colonial regime constructed a
social order in which each ethnic group played a distinctive role. As late as
1957, when the Federation of Malaya gained independence, the occupational

structure was still highly segregated in ethnic terms. Malays, Chinese, and Indians all had their typical occupations. As Chinese males moved from lowerpaid to higher-paid jobs, they were usually replaced, not by Malays or Indians
but by Chinese females. The great majority of Malays were still peasant farmers,
but increasing school attendance by Malay children foreshadowed major social
changes. When greater Malaysia was formed in 1963, the national economy,
although relatively prosperous, was still commodity oriented and unable to accommodate the aspirations of educated youth. A defining moment in Malaysian
history was the Kuala Lumpur race riots of May 1969, in response to which the
government launched the New Economic Policy (NEP).
POLICY OBJECTIVES
Malaysia has never tried to manage the size distribution of income as such.
Instead it has aimed at changing selected aspects of the income distribution.
These include the incidence of poverty, the distribution of income among ethnic
groups (as opposed to within them), and (sometimes and in some respects) the
distribution of income among regions of the country. It has also tried to alter
patterns of participation in ownership and control of wealth, entrepreneurship,
and employment by occupation and industry.
Following extensive debate, the government unveiled the NEP in June 1971.
Its announced objectives were carefully crafted to reassure the Alliance’s core
Malay support, while offering something to its Chinese and Indian supporters
as well. The first official objective was to progressively reduce and eventually
eliminate poverty. This appealed to the low-income rural Malays who were
likely to be the main beneficiaries of anti-poverty programs but was readily


The Malaysian Experience

13

accepted by other groups because it had a strong ethical basis and did not
explicitly favor any ethnic group.
Secondly, the NEP aimed “to restructure society so as to eliminate the identification of race with economic function.” Two particular forms of restructuring

were emphasized. The first involved altering the employment structure, which
was still marked by ethnic specialization in 1970, although less than in 1957.
The second was to give the Malays a stake in the ownership and control of
wealth. Malays owned only 2 percent of company shares at the time, operated
few businesses, and occupied few managerial or professional positions in the
private sector. While Malays dominated the public service, non-Malays held
many governmental positions, including most of those that required technical
qualifications. The NEP aimed to give the Malays 30 percent of share ownership
by 1990 and to create a “Malay commercial and industrial community.” Like
“affirmative action” programs elsewhere, the restructuring goals of the NEP
generated considerable controversy and provoked opposition from members of
non-favored groups.
An important stipulation of the NEP was that both poverty reduction and
restructuring should be achieved in the context of rapid economic growth. This,
it was said, would permit substantial redistribution to occur over a period of 20
years without anyone having to give up an asset, a job, or a business. All
redistribution would come out of the dividend from growth. While no static
redistribution was to take place, some loss of opportunity to improve one’s
economic lot was implicit in the restructuring goals of the NEP.
The NEP was to last until 1990. By that year, Malays were to own and control
30 percent of business enterprises in all industries and scale levels. Substantial,
although less precisely defined, progress was also to have been made toward
the other goals. The NEP thus combined ambitious targeting with a relatively
relaxed implementation schedule. Malaysia was fortunate to possess a political
system that was stable and predictable enough to lend credibility to a pledge
made for delivery 20 years hence.
The biggest issue among economists in 1969–1971 was whether the goals of
the NEP were internally consistent. We all believed in the “big trade-off” between efficiency and economic growth, on the one hand, and redistribution on
the other (Okun 1975). Increased emphasis on redistribution would surely lower
efficiency and therefore growth rates, especially when the main entrepreneurial

groups, the Malaysian Chinese and the foreign investors, were in effect being
taxed to finance greater Malay participation (Perkins 1998). Both proponents
and opponents of the NEP believed that this trade-off existed. Opponents used
it as a basis for arguing that a less explicit redistribution policy, more favorable
to economic growth, would bring many of the benefits sought by advocates of
the NEP. Many NEP proponents, meanwhile, were prepared to accept slower
growth in exchange for more balanced participation in economic activity.
Not explicitly targeted but at the root of the problem of economic inequality
was the “disparity ratio,” the ratio of average non-Malay (or Chinese) income


14

Growth, Income Security, and Fiscal Reform

to average Malay income. In 1970 it was over 2 to 1, both for non-Malays
versus Malays and for Chinese alone compared to Malays (Snodgrass 1980, 82).
This was higher than the ratios prevailing in many other ethnically heterogeneous countries (e.g., between whites and blacks in the United States) but much
lower than the 9-to-1 ratio that currently exists between whites and blacks in
South Africa. If the NEP succeeded, the disparity ratio should come down.
Other goals received occasional mention but were less integral parts of the
NEP. For example, the attention given to the objective of improved regional
balance waxed and waned in successive planning documents.
During the 1970s and 1980s the NEP ran its course, with consequences that
are summarized below. As 1990 approached, there was considerable debate
about what should replace the NEP. Dr. Mahathir settled the question in his
February 1991 speech, “The Way Forward,” which revealed the now famous
and widely imitated “Vision 2020” (Mahathir 1991). Preferences for Bumiputra
were maintained under the National Development Policy (NDP), but no specific
new targets were set and much emphasis was placed on achieving a high rate

of economic growth so Malaysia could become a “fully developed country” by
2020.

POLICY INSTRUMENTS
The NEP was in one important sense a misnomer. Its early official formulations defined national objectives but said little about what policies would be
pursued to attain those goals. Committing the nation to ambitious new objectives
apparently took so much energy that the search for policy instruments had to
wait. Policy formulation proceeded throughout the implementation period. Policies for restructuring society were developed first. During the 1970s the role of
public enterprise was stressed. More than 1,000 state enterprises were created
by the federal and state governments. Starting with the controversial Industrial
Coordination Act of 1975 (ICA), private enterprise was pressed to contribute to
the realization of NEP restructuring objectives. Share holdings reserved for
Bumiputra were initially distributed on purely political criteria, but the creation
of Permodalan Nasional Berhad (PNB) in 1978 inaugurated a program of wider
distribution that eventually put mutual fund shares in the hands of millions of
Malaysians.
The essential policy instrument for restructuring society was the quota.
Society-wide targets for share ownership and the ethnic composition of employment were increasingly applied at the enterprise level. Firms had to
demonstrate compliance with the 30 percent ownership and control ratio and
ethnically proportional employment whenever they wanted to raise capital, expand production, or go into a new line of business. The ICA provoked vociferous objections from local Chinese business and milder opposition from foreign
investors. The controversy raged until successive amendments of the ICA in


The Malaysian Experience

15

1977–1986 gradually eliminated some of the features that business found most
objectionable.
Education, especially higher education, provided important support for employment restructuring from the supply side. Greatly increased numbers of Malays were educated through the expansion of local institutions, the application

of admission quotas to these institutions, and the sponsorship of young Bumiputra for overseas training. The quota system caused many non-Bumiputra applicants to local universities to be rejected, driving those whose families could
afford it to send their children overseas at personal expense and forcing many
others to forego higher education. Private universities have only recently been
permitted, and the implementation of this more liberal policy has moved slowly
under tight governmental control.
Economic growth was rapid in the 1970s, in large part because of favorable
circumstances. Commodity prices generally rose, and newly discovered petroleum and natural gas resources came on line. But rapid economic growth during
this period was not entirely attributable to good fortune. During this period
Malaysia began its successful transition from a commodity exporter to a producer of manufactured goods for the world market. Building on assets such as
good infrastructure and relatively well-educated (but not particularly cheap) labor with some knowledge of English, the government used export processing
zones (EPZs) as the centerpiece of its promotional policy. From the opening of
the first EPZ at Bayan Lepas in Penang in 1972, the electronics industry was
specially targeted, and Malaysian manufacturing grew with it. By 1980, manufacturing had risen to 16 percent of total employment, up from just 9 percent
in 1970. The growth of manufacturing for export made major contributions to
economic growth. At the same time, it improved income distribution by creating
higher-paying jobs for migrants from rural areas.
Private investment lagged during the ICA controversy of the late 1970s. Early
in the next decade things got even worse when a worldwide recession cut the
demand for computer chips as well as commodities. The government first tried
to spend its way out of the recession, which led only to rising deficits and debt,
and then sharply applied the monetary and fiscal brakes, creating the recession
of 1985–1986. With unemployment rising and income falling, the government
liberalized its investment policy in 1986. Besides diluting the ICA as an incentive to domestic business, it significantly liberalized foreign ownership and employment provisions and improved investment incentives for overseas investors.
The timing of this move proved exquisite. Rising wages, appreciating currencies,
and the cancellation of trade preferences under the General System of Preferences (GSPs) were driving capital out of Japan, Taiwan, and Korea, just when
Malaysia had decided to be more receptive to direct foreign investment. Malaysia experienced a huge investment boom, measured in the billions of U.S. dollars, which led to a decade of growth (1987–1997) of nearly 9 percent on
average. The consequent rapidly tightening labor market drew more than 1 mil-


16

Growth, Income Security, and Fiscal Reform

lion unskilled foreign workers into the country to do the jobs that no longer
appealed to Malaysians.
The affirmative action program backed by quotas in higher education, nonagricultural jobs, and share ownership has been maintained since the early
1970s. Debates about the NEP parallel affirmative action discussions in India
and the United States, the other two prominent practitioners of such policies. A
unique element of the Malaysian case is the emphasis on economic growth,
which made it possible to favor the Malays at far lower cost to other members
of society than would have occurred if growth had been slower. The effort made
to help Malays become more productive in the jobs to which they were receiving
favored access through education and training (including informal on-the-job
training) was also significant. Negative aspects of affirmative action encountered
in Malaysia (as elsewhere) include the tendency to favor the better off within
the target ethnic group and the difficulty of eliminating an established system
of preferences after the need for it may have passed, but a strong lobby for its
continuation has grown up (Young 1998).
Other than Bumiputra preferences, the NEP had no consistent policy framework. The reliance on public enterprise as a tool for restructuring that characterized the 1970s was replaced in the mid-1980s by efforts (“Malaysia, Inc.”
and privatization) to promote the development of private enterprise, albeit in
close cooperation with the government. Pragmatism was the watchword of the
policy makers, and when necessary in the 1980s the emphasis on redistribution
was set aside temporarily while economic growth was restored.
Poverty alleviation took a back seat to the restructuring of society in the early
years of the NEP. Only with the publication of the Third Malaysia Plan in 1976
was a plausible policy framework for poverty reduction announced. This plan
(Malaysia 1976), published shortly after the death of the second Prime Minister,
Tun Abdul Razak, and the assumption of power by his successor, Tun Hussein
Onn, increased the emphasis on economic growth. It also released new information on the extent and pattern of poverty in the country and introduced an
explicit framework for poverty alleviation. This focused on several “poverty

groups” (rice growers, rubber smallholders, fishermen, estate laborers, etc.) and
incorporated a set of development programs (some new, many ongoing) that
aimed at raising the incomes of those who worked in the industry or occupation
concerned.

OUTCOMES
According to official figures, real GNP grew at an average rate of 7.6 percent
per annum in the 1970s, then slowed to 5.9 percent in the 1980s. The major
difference between the two decades is that commodity price trends were more
favorable in the 1970s (when all significant commodity prices followed a rising
trend) than in the 1980s (when all except timber fell), a decade punctuated by


The Malaysian Experience

17

the recession of 1985–1986. For the full 1970–1990 NEP period, real GNP
growth averaged 6.7 percent a year. For 1970–1997, the average was 7.1 percent.
Growth of per capita income is a bit harder to specify because of some uncertainty about population growth. If one assumes that the 1991 population
census total reflects the same degree of underenumeration as the 1980 Post
Enumeration Survey, population growth averaged 2.5 percent annually in the
NEP period. This estimate may not take full account of illegal immigration, but
if it does, real GNP per capita grew at an average of about 4.2 percent from
1970 to 1990. Again, the growth rate was lower (probably 3.2%) in the 1980s
than in the 1970s (4.5%). Not only was economic growth slower in the 1980s,
but population growth was a quite a bit faster (2.3% in the 1970s vs. at least
2.7% in the 1980s, and more if immigration is underestimated).
Malaysia’s 4.2 percent average growth rate of real GNP/head in 1970–1990
places the country 10th among 126 nations with populations of 1 million or

more, according to World Bank statistics.7 Seven of the nine countries that grew
faster are in East Asia: the four Little Dragons (Korea at 7.4%, Taiwan at 7.1%,
Singapore at 6.1%, and Hong Kong at 5.9%), plus Big Dragon China (5.4%),
Thailand (4.8%), and Indonesia (4.6%). In the rest of the world, only two tiny,
resource-rich African countries grew faster than Malaysia: Botswana (8.1% a
year) and Lesotho (4.5%). Thus, Malaysia’s growth performance beat nearly all
countries in other regions of the world, yet most East Asian countries did better
than Malaysia. The only ones that grew more slowly were Japan, whose growth
rate fell to 3.5 percent during the period, and the perennial underachievers: the
Philippines, the Indo-China countries, and Myanmar.
Varying the end points for these growth rate estimates has limited influence
on the rate of growth calculated. Despite some ups and downs, Malaysia has
done a good job of sustaining economic growth. A World Bank–sponsored comparative study on the political economy of poverty, equity, and growth cited this
as a major reason Malaysia has outperformed Sri Lanka and most other developing economies (Bruton et al. 1992). Although 1998 was the worst year in
Malaysian economic history, growth resumed in 1999, and a return to high
growth rates can be anticipated.
Contrary to the predictions of most economists, rapid economic growth coexisted with the implementation of the NEP and led to several important forms
of redistribution. There are many ways of measuring these changes. A relatively
narrow focus on specific quantitative goals indicates very substantial progress,
although NEP targets were exceeded in some areas and only partially achieved
in others.
Poverty eradication was a clear-cut, impressive success. According to official
definitions, nearly half (49.3%) of all households in Peninsular Malaysia lived
in poverty in 1970. Official estimates for 1990 record a decline to 15.0 percent
in Peninsular Malaysia, bettering the first Outline Perspective Plan’s (OPP) original target of 16.7 percent. The official figure for Malaysia as a whole in 1990
is 17.1 percent. One does not have to take the official measures compiled by


18

Growth, Income Security, and Fiscal Reform

Table 2-1
Poverty in Malaysia, 1970–1995 (percentage of households below the poverty line)

Notes:
(1) Measured in U.S. dollars at 1985 prices (purchasing power parity).
(2) Peninsular Malaysia only.

the Economic Planning Unit on faith. Independent calculations by Ishak (1990;
1993) and Ahuja (1998), among others, confirm that a very substantial decline
in poverty incidence took place in 1970–1990 and has continued since then
(Table 2-1).8 Urban poverty was virtually eliminated by 1990, while rural poverty shrank rapidly in Peninsular Malaysia, mainly because of growing opportunities for non-agricultural work. Most of these new jobs required migration to
the towns, but many others were consistent with continued rural residence.
Employment restructuring basically succeeded. The number of Bumiputra
(Malays and other indigenous people) working in the industrial sector (mining,
manufacturing, construction, utilities, and transport) in Peninsular Malaysia
soared from 173,000 in 1970 to 918,000 in 1990. Similarly, Bumiputra employment in the service sector went from 213,000 to 1.2 million. These totals
substantially exceeded OPP targets (Malaysia 1991a, 47). Achievements in occupational group terms are also impressive. By 1990, Bumiputra were slightly
overrepresented in professional and technical and in service occupations (due
largely to government employment) and almost proportionately represented in
clerical work. They were coming up fast in production jobs and remained seriously underrepresented only in administrative and managerial positions and in
sales work. These broad occupational groups do not fully reflect the breakdown
into high-, middle-, and low-level employment. In 1990 Bumiputra were still