The New Economic Policy: Revisiting origins and misconceptions

Dr Lee Hwok Aun, Senior Fellow, ISEAS-Yusof Ishak Institute, Singapore

Debate among Malaysia's political and intellectual elite—over the continuing affirmative action measures and targets of the New Economic Policy (NEP) in development plans and policies, beyond its stated 1971–1990 timeline—has continued into 2021, its 50th anniversary.

On the one side, a popular argument for setting aside the NEP’s measures and targets is that 1990 marked an ‘expiry date’, and so perpetuating them breaks an implicit promise made half a century ago by the NEP’s architects. Conversely, advocates for retaining the measures and targets assert that they have yet to fully achieve the NEP’s objectives, especially the target of 30 per cent Bumiputera equity ownership of Malaysia's domestic corporations.

The continuing, almost adversarial debate largely stems from the origins of the NEP and from misconceptions in subsequent discourse. This article revisits these origins, from the policy discussions of 1969–1971; through the ‘initial version’ of the NEP (also referred to as NEP71), incorporated into the Second Malaysia Plan, 1971–1975 (MP2); to the ‘full-fledged’ development plan (also referred to as NEP76), rolled out in 1976 in the Third Malaysia Plan, 1976–1980 (MP3).

This article argues that the seeds of the decades-long debate were planted in two stages. First, the initial version of the NEP in MP2 established the two ‘prongs’ of poverty reduction and social restructuring (discussed below), but inadequately specified policy mechanisms and only obliquely articulated the goal of Bumiputera 'full economic partnership', while also offering an assurance—one that it could not guarantee—that no group would feel any sense of deprivation. Second, the full-fledged development plan in MP3 narrowed the NEP’s long-term driving objective from full participation of Bumiputera in the economy to 30 per cent corporate equity ownership. These lacunae and shifts allowed for two misconceptions in policy and popular discourse, namely that, implicitly, the NEP would be dismantled in 1990; and that, explicitly, 'no group will experience any loss or feel any sense of deprivation' (EPU, 1971).

NEP71: The initial version of the NEP in MP2

In the aftermath of the ethnic violence of 13 May 1969 and under the emergency rule of Prime Minister Tun Abdul Razak’s National Operations Council, the government sought to overhaul its development planning approach. Intense policy deliberations progressed, but with marked differences between the long established (January 1962) ‘EPU school’ (Economic Planning Unit), which advocated a more growth-led approach, and the more recently established (July 1969) ‘DNU school’ (Department of National Unity), which pressed for expansive state intervention, with the foremost priority reducing racial inequalities. (This bifurcation engendered the two main strands of the subsequent debate.) The latter, which had engaged a Harvard advisory group, helmed by Just Faaland, and whose views converged ideologically with those of the new Prime Minister Razak, prevailed (Faaland, Parkinson, and Saniman, 1990). In the second half of 1969 and 1970, a series of six policy papers forcefully advocated vigorous actions to redress racial inequalities—in the context of economic growth and alongside poverty reduction. The first early draft of the NEP, the third paper in this series, circulated by DNU to government departments in March 1970, set out the new objectives and priorities for national development (Faaland, Parkinson, and Saniman, 1990).

Smoldering buildings in the aftermath of the 13 May 1969 race riots
Source: https://asiatimes.com

The assertiveness of this perceived ‘Malay-first’ agenda with a predominantly one-community focus provoked alarm among senior non-Malay politicians. Tan Siew Sin, Finance Minister (1959–1974), together with EPU Director-General (1971–1978) Thong Yaw Hong, intervened to moderate the tone and scope of NEP71. Thong described some early proposals as extremely interventionist and potentially deleterious to Chinese business (Heng, 1997). This apprehension over the outstretching arm of the state is also reflected in the explanation of Faaland, Parkinson, and Saniman (1990) that the first draft of NEP71 specified few quantitative targets due to political reservations about the policy’s ambition.

Abdul Razak, Prime Minister, at a meeting with the Finance Minister, Tan Siew Sin, late 1960s
Source: National Archives Malaysia, Accession No. 2001/0036556W

The resulting final draft of the document, NEP71, was officially tabled in Parliament on 12 July 1971, as part of MP2. Chapter 1, entitled ‘The New Development Strategy’, painted the NEP in broad strokes, while repeating some of the more inspiring policy statements—and a few provisos secured through the intervention of non-Malay politicians and bureaucrats. As put by Milne (1976, p. 239), NEP71 restated ‘the “bargain” between the races.’

NEP71 judiciously formulated the two-pronged objectives of poverty reduction irrespective of race, and social restructuring to eliminate the still-common identification of race with economic function. The ‘irrespective of race’ proviso was inserted through Thong’s intervention (Heng, 1997)—a constructive outcome. Another phrase incorporated as a protective layer for minorities, however, appeared to be a blessing but in some ways turned into a curse—the assurance that ‘no group will experience any loss or feel any sense of deprivation’. In 1976, the Malaysian Chinese Association (MCA) President (1975–1983), Lee San Choon, cautiously welcomed MP3's recommitment that no group would experience loss or feel deprived, adding that, ‘if we can achieve our targets for the rapid growth and expansion of the economy, there need be no cause to fear that this assurance will be compromised’ (Lee, 1976, p. 4).

However, not only was this assurance undeliverable, it also augmented minority-group expectations that NEP71 would not disrupt the socioeconomic opportunities available to them, thus intensifying majority–minority conflict, especially as the Malay-dominant government was held accountable for this assurance, fuelling a sense of distrust among minority groups.

Lee San Choon’s underlying assumption was that economic growth would generate enough new opportunities so that redistribution of old opportunities would be unnecessary. Yet minority groups attacked certain measures for violating this principle of not taking away from one group to give to another, most prominently the 1975 Industrial Coordination Act (ICA), which required 30 per cent of the equity of manufacturing licensed firms—predominantly foreign and Chinese owned—to be transferred to Bumiputera interests. In other areas, however, concerns about minority deprivation surfaced—most saliently, public university admissions, where ethnic quotas were implemented under NEP71. But whereas the ICA was amended in 1977 to exempt small firms from the equity-ownership requirement (see below), ethnic quotas in public universities that favour Malays and other Bumiputera persist.

The two prongs of NEP71 were distinct, and their operational domains differentiated. The poverty reduction prong was in theory to be achieved through increased productivity; structural change through the movement out of agriculture into modern sector employment; and enhanced infrastructure, utilities, education, and social services. The social restructuring prong—the more controversial of the two—would involve modernization of rural economies and ‘rapid and balanced growth of urban activities’, education and training, and ‘above all, ensure the creation of a Malay commercial and industrial community in all categories and at all levels of operation’ (EPU, 1971, pp. 4–6).

NEP71 failed to state, however, how social restructuring would operate in areas that entailed redistribution of scarce opportunities and the application of Bumiputera-exclusive access or ethnic quotas. Indeed, social restructuring predominantly took effect in the public sector and public institutions—public universities, government employment, and state-owned enterprises. The official government perspective overlooked how continued growth of the economy, and especially of private sector opportunities, would not change the fact that public sector opportunities would remain relatively scarce—and thus, attempts to allocate preferentially to Bumiputera would unavoidably come at some expense of non-Bumiputera. Instead of the assurance that no group would feel deprived, minimizing group exclusion and fostering fair opportunity would have constituted a more coherent and measured assurance.

Abdul Razak briefing on National Economic Policy to government agencies on 31 July 1975
Source: National Archives Malaysia, Accession No. 2001/0043298W

Target-setting for the first prong of NEP71 was relatively straightforward: from a 1971 baseline of income poverty for the different communities, a 1990 target could be estimated, and progress over time could be monitored.

Target setting for the second prong was more challenging. The stated aim was that Bumiputera would, within one generation, be ‘full partners in the economic life of the nation’ (EPU, 1971, p. 1). It implied Bumiputera self-reliance, but the concept was difficult to define quantitatively because NEP71 lacked clear identification of the key areas of social restructuring, all of which involve learning and the acquisition of capability and competitiveness: higher education, high-level occupations, enterprise development, and wealth ownership. For the allocation of opportunity to Bumiputera in these areas, the focus of implementation needed to be on developing capability and competitiveness.

NEP71 recognized that social restructuring, especially among the Malay commercial and industrial community, ‘may take longer than one generation to be fully accomplished’ (EPU, 1971, p. 9). However, it did not follow with explanation of the necessary timeframes. In sum, NEP71 insufficiently clarified policy scope and mechanisms, set expectations too high, and omitted the accounting for varying timelines of its myriad programmes.

NEP76: The full-fledged NEP in MP3

The Malaysian government's Outline Perspective Plan, 1971–1990, initially incorporated into the mid-term review of MP2 and then launched as a definitive policy within the MP3, presented the NEP in greater technical and operational detail, with a fuller set of targets and programmes than NEP71 (EPU, 1973). The general thrust of NEP76 aligned with NEP71 but differed on one pivotal point—its declaration of the goal to be achieved ‘within one generation’ changed from ‘full economic partnership’ to ‘30 per cent Bumiputera equity ownership’. The ultimate goal had narrowed from the Bumiputera community’s economic empowerment to its ownership of equity specifically, which now took pre-eminence in NEP76’s second prong.

One reason for this narrowing was the political and policy shift in the years between the formulation of NEP71 and NEP76, notably the waning of top-level resistance to more aggressive Malay redistributive measures. NEP76 placed Bumiputera equity ownership on a pedestal, as it were. The passing of the ICA in 1975 had triggered spirited protest by the Chinese business community who perceived those sections of the Malay-dominant bureaucracy aspired to 30 per cent Bumiputera equity ownership earlier than 1990 (Gerakan Rakyat, 1976; Lee, 1976). At the ICA’s introduction, only firms with a share capital below RM100,000—a very low amount and so liable to capture the vast majority of Chinese firms—were exempted from relinquishing equity to Bumiputera interests. The backlash secured amendments to this threshold, which was raised to RM500,000 in 1977. Still, 30 per cent Bumiputera equity ownership would become the most keenly tracked and politically charged NEP76 goal.

Mahathir Mohamad, Prime Minister with EPU Director-General Thong Yaw Hong at a press conference, early 1980s
Source: NSTP archives

This inordinate emphasis on equity ownership would be reinforced over the years, and presaged the overriding pursuit of the Bumiputera commercial and industrial community, especially from the late 1980s. The 30 per cent target provided a simple reference point but detracted from the broader socioeconomic empowerment that is more important for the Bumiputera community’s full economic partnership as envisaged in NEP71. Bumiputera expansion in higher education, skills development, and bottom-up enterprise growth was sparsely monitored in Malaysia’s planning documents from the 1970s, whereas equity ownership statistics were consistently given prominence. Progress in narrowing inter-ethnic household income disparities, and in Bumiputera representation among professionals and managers, was also routinely reported, but accorded secondary importance. This is reflected in the deliberations for the NEP successor of 1989–1991, in which the attention to Bumiputera equity ownership—at 20.3 per cent in 1990—exceeded all other policy areas. This shortfall, against the 30 per cent target, became the raison d’être for continuing the NEP (Lee, 2021a).

The opposing side of the debate also focused excessively on equity ownership and contesting the methodology employed in measuring it. The critique, however, also tends to give too much weight to equity ownership—as though it represents the totality of the NEP—and implicitly calls for the NEP to be ended if Bumiputera equity ownership can be shown to exceed 30 per cent.

The NEP debate today: Polarization

To summarize: discussion of the NEP leads to polarization among the political and intellectual elite in three main ways.

First is the complaint, recycled for over three decades, that the government reneged on an implicit promise to end ethnic-based affirmative action programmes in 1990.

Second, the framing of the debate in terms of continuing the NEP or terminating the NEP misrepresents the subject as one monolithic and static whole, rather than a constellation of myriad programmes (Lee, 2021b).

Third, the debate still focuses on whether to retain or discard Bumiputera-targeted policies, with the ethnic majority gravitating towards support, while minority groups have shown a predilection towards opposition. Yet this polarization is detached from recent changes in Malaysia: the government has, for example, broadened group-targeted programmes, notably, small or medium-sized enterprise promotion for the Indian community, higher education access and self-employment for Orang Asli, and women’s representation in decision-making positions. These group-targeted policies, akin to the NEP’s second prong but of lesser scope, are generally welcomed—even by the same parties that generally oppose pro-Bumiputera programmes. This inconsistency detracts from resolving the debate.

In an era of national and international uncertainty greater than seen for many years, Malaysia cannot afford to allow itself to be rent asunder by old, majority/minority habits of ‘closing ranks’ over the NEP. All parties must seek and adopt new policy approaches that secure a balance of group-targeted programmes across the whole range of beneficiaries.