Malaysia Economy vs Malaysia Politics

The budget Malaysian Prime Minister Najib Razak delivered last week is being interpreted as the opening parry for a possible early election next year. If that's so, he'll have a lot more work to do to spur the kind of growth voters tend to reward when they head to the polls.

That will sound like an odd claim, given the government's projections. The Najib administration pegs GDP growth at 7% for this year and between 5% and 6% next year. Some analysts think those estimates may be on the low side. Exports have rebounded after the global downturn and domestic consumption is rising.

But problems lurk beneath those headline numbers. The economy ran a capital-account deficit for all but one of the past 11 years, an odd situation for a developing country that ought to be importing capital to finance growth. Portfolio investors aren't fleeing the stock market—there was a small portfolio surplus last year. Rather, direct investment, the kind that builds new factories or seeds new businesses, has been exiting since 2007. This outflow amounted to an astonishing 21% of gross fixed capital formation last year, according to the United Nations.

In other words, Malaysians think it's more profitable to invest abroad than at home. One reason is that government, not private entrepreneurship, is driving growth. Government consumption grew 107% between 2000 and 2009, while private consumption grew 78%. On the production side, government services expanded by 77% in that period, second only to the financial industry as a growth engine (83%). This has been financed with deficit spending, which will be roughly 5.5% of GDP next year.

Enter Mr. Najib. To his credit, he said Friday "the time has come for the private sector to resume its role as the engine of growth." But his budget focused mainly on attracting investment to public-private partnerships to build new public works projects, on which he'll spend 137 billion ringgit ($44 billion). That includes 40 billion ringgit for a mass transit system in Kuala Lumpur—the kind of infrastructure Malaysia needs—but also five billion ringgit on a new 100-story office tower. It's worth asking whether thrusting government into the commercial real-estate business is really the best way to let the private sector blossom.

Building the 5 billion ringgit tower is a questionable issue, do we really need such as tall tower? To Najib and PNB, they said yes "With this new landmark, we'll put Malaysia on the global map of investment community, to spur foreign direct investment (FDI)". They have the same mindset like Dubai, building Burj Dubai (The world tallest man-made building). But remember, what they have is the world tallest building, our current proposed 100 storey building is still far behind the Burj Dubai. Do we really need this expensive building to place us on the map? Does more developed countries like Singapore or even Switzerland has a world freaking tallest building to put them on the map? No. That huge sum of money which is financed from debt should be put to better use.

Meanwhile, Mr. Najib's focus on public works distracts from all the other ways Kuala Lumpur deters private investment. For instance, affirmative-action preferences for majority ethnic Malays are a stumbling block for all investors, foreign and domestic, who understand that hiring the best employees regardless of ethnicity is key to generating returns. Corruption remains a major irritant, and the politicized sodomy trial of opposition leader Anwar Ibrahim raises rule of law concerns.

Mr. Najib tries to take a few steps forward. The budget proposes making government-linked companies sell stakes in some listed companies to boost stock market liquidity. Mr. Najib also would offer three new stockbroking licenses to domestic or foreign banks. But, assuming they're even implemented, these reforms won't amount to much if they aren't backed up by much broader and deeper liberalization to set animal spirits astir. Despite other reform gestures in recent years, a "big bang" does not appear to be on the horizon.

If Mr. Najib is contemplating an early vote, he's wagering on current economic growth, his party's tightening grip on civil discourse, and the lack of viable opposition alternatives to win another victory. That might work in the short term. But investors already are voting against Mr. Najib, and if Kuala Lumpur doesn't change that, it may be only a matter of time before voters follow suit.

*Quotes and figures adapted from Wall Street Journal Asia, article modified by Hong.