Malaysia will benefit if it moves past race-based policies

Najib’s Affirmative Action – WSJ.com

One and a half cheers to Malaysia’s new Prime Minister for revisiting that country’s affirmative action laws, one of its bigger barriers to success.

Najib Razak, who took office April 3, announced Wednesday that he is lifting some of the regulations designed to benefit ethnic Malays but that actually deter entrepreneurship and foreign investment. Chief among these is a rule that companies in many industries be at least 30% Malay-owned. That rule will end in some parts of the services sector, including computer services and parts of the tourism and health-care sectors.

Wednesday’s liberalization applies only to a very narrowly defined set of businesses, such as travel agencies “for inbound travel only” and bars “in four- or five-star hotels only.” Retail, banking and manufacturing still have cumbersome ownership requirements and Mr. Najib has largely avoided liberalizing areas where his (mainly Malay) political supporters have strong vested interests.

When racial preference laws were passed in the 1970s, the purpose was to defuse race rioting by poor Malays directed at more prosperous Chinese and Indian Malaysians. Over time they have made the country poorer than it could have been by stifling entrepreneurship. The policies are also a consideration for foreign investors, who often find their businesses subject to laws requiring a certain percentage of Malay ownership or hiring quotas.

Malaysians increasingly understand these policies are holding them back — witness the opposition’s conclusion that opposing them is smart politics. Mr. Najib may be trying in part to co-opt his political opponents. Whatever his motive, he would be smart to continue on this anti-affirmative-action jag, as he says he will do next week with an announcement on financial services.

Since the New Economic Policy was announced in 1971, Malaysia’s preferential treatment of Malays in education and business has hampered growth and soured the nation’s politics. If the country can now move past these race-based policies, its economy and democracy will benefit.