WHEN Datuk Seri Anwar Ibrahim assumed office as the Malaysian prime minister in December 2022, he received a mandate beset by the economic fallout of a global pandemic and longstanding structural deficiencies.
Anwar – described by The Economist as “the most enigmatic figure in South-East Asian politics for half a century” – inherited this challenge at a pivotal moment.
Malaysia’s premature deindustrialisation, where the manufacturing sector’s contribution to GDP and employment diminishes at a lower income level than anticipated, had led to structural stagnation.
The exodus of skilled workers in search of better opportunities abroad further depleted the domestic talent pool.
These vulnerabilities were exacerbated by systemic corruption and a burgeoning national debt which had reached alarming levels.
Fiscal reforms and cost optimisation
How did Anwar plan to address these pressing issues? To tackle fiscal inadequacies, he introduced a series of new taxes.
These included a higher service tax and a capital gains tax, projected to boost government revenue by approximately US$728 million (approximately RM3.41 billion).
Additionally, the progressive wage policy (PWP) was introduced to align wage growth with productivity, aiming to combat wage stagnation and elevate living standards.
This policy sought to ensure that as workers become more productive, their wages increase correspondingly – thereby enhancing their purchasing power and overall economic well-being.
On the cost optimisation front, Anwar’s administration undertook the politically challenging task of rationalising subsidies and managing civil service costs.
Transitioning new civil servants to an Employees Provident Fund scheme – projected to reduce long-term pension costs – was a significant step.
This move aimed to alleviate the financial burden on the government by shifting future pension liabilities to a more sustainable model.
Additionally, the enactment of the Public Finance and Fiscal Responsibility (FRA) Act institutionalised prudent fiscal management with targets for a 3% fiscal deficit and a 60% debt-to-GDP ratio.
This legislative framework is intended to ensure that Malaysia’s fiscal policies remain sustainable in the long run, providing a stable economic environment conducive to growth.
Investment and economic growth
Efforts to enhance investment have seen the administration expedite foreign direct investment approvals and improve the ease of doing business.
Significant investments have been attracted in high-value sectors such as semiconductor fabrication and digital technology.
By focusing on sectors with high growth potential and technological advancement, Malaysia aims to ascend the global value chain and foster a more dynamic and competitive economy.
Measures to boost investment quality focus on labour productivity through automation and increased spending on research and development.
These initiatives are designed to create a more innovation-driven economy, reducing reliance on low-skilled labour and enhancing overall productivity.
These reforms have significant implications for both Malaysia and the broader Asian region.
Nonetheless, challenges persist.
Recently, Malaysia’s attempt to retarget petrol subsidies faced potential setbacks following the government’s significant loss in a state by-election over the weekend.
Voters in Sg Bakap expressed their discontent, with the opposition party PAS retaining the rural seat in northern Penang state by a substantial majority of 4,200 votes on Saturday, despite low voter turnout.
This defeat, driven by high living costs linked to other recent subsidy cuts, highlighted public dissatisfaction with Anwar’s economic policies.
The South China Morning Post reported that “Malaysia’s uneven pandemic recovery has left millions of private-sector workers dipping into their retirement savings to cover living expenses after changes to the country’s mandatory savings fund allowed billions of ringgit to be withdrawn in a matter of weeks.”
As a result, Malaysia’s ruling coalition was unable to secure a seat in a by-election in Anwar’s home state.
Party leaders attributed the more significant loss to rising fuel prices.
According to the Election Commission, Bloomberg reported that the opposition, Perikatan Nasional (PN), more than doubled its winning margin in the Sg Bakap state seat.
However, while losing the state seat, Anwar’s coalition achieved a victory in a federal seat.
In the recent Kuala Kubu Bharu elections, DAP, which is part of Anwar’s coalition won by a 3,869-vote majority, polling 14,000 votes against the opposition PN’s Khairul Azhari Saut, who received 10,131 votes.
This highlights two sides to the story: on one hand, the dissatisfaction with certain economic policies has led to significant setbacks at the state level, while on the other, successes in federal elections suggest that Anwar’s coalition still retains substantial support in other areas.
The mixed outcomes reflect the complex and evolving political landscape in Malaysia.
The road ahead
These electoral results underscore the delicate balance Anwar’s administration must maintain between implementing necessary economic reforms and managing public discontent.
While the introduction of new taxes, rationalisation of subsidies, and investment in high-value sectors are critical steps towards economic rejuvenation, the impact on the populace – particularly in terms of living costs – cannot be underestimated.
Anwar’s ability to navigate these challenges will be crucial in determining the long-term success of his economic policies and, by extension, Malaysia’s economic future.
And so, as Malaysia stands at this crossroads, the coming years will test not only Anwar’s political acumen but also the resilience of a nation striving to reclaim its economic vitality and global standing.
The world watches closely – will Malaysia’s journey set a precedent for other nations navigating similar post-pandemic recoveries and structural transformations?
The answer remains to be seen, but one thing is certain: Anwar’s leadership will be a critical determinant in this unfolding narrative. – July 11, 2024
Benjamin Laker is a leadership professor at Henley Business School, University of Reading.
Originally published in Forbes, republished with permission.