Thursday, March 29, 2007
Abdullah relaxes rules to create Malaysia's Shenzhen
By John Burton in Singapore
Thursday, March 29, 2007, FT
Abdullah Badawi, Malaysia's prime minister, has described the planned Iskandar Development Region in the southern state of Johor as playing the same role for Singapore as Shenzhen does for Hong Kong by offering a cheap place to do business.
But Iskandar also resembles Shenzhen as a laboratory to promote economic reforms, just as the Chinese special economic zone did in the 1990s.
Among incentives recently announced by Mr Abdullah to encourage foreign investment in Iskandar was the easing of affirmative action rules favouring the ethnic Malay majority, often seen as the biggest obstacle to attracting overseas capital.
Under what is known as the New Economic Policy, foreign investors are required to offer a 30 per cent stake in businesses to a local ethnic Malay partner. The government is to abolish the rule for selected service industries in Iskandar, including healthcare, tourism and education.
Christopher Woods, chief strategist at CLSA, says the announcement “is the latest and most dramatic piece of good news to come out of Malaysia”, which is also relaxing foreign exchange rules and scrapping property gains tax to promote capital inflows.
Officials connected with the project say the concessions are the cutting edge of broader reforms to reverse a drop in foreign direct investment, which fell by 14 per cent to $4bn (�bn, £2bn) last year.
The easing of affirmative action rules is likely to provoke a backlash from the ruling United Malays National Organisation, which has ruled Malaysia since 1957 based on its championing of rights for ethnic Malays and its policy to close the income gap with the ethnic Chinese minority.
Mr Abdullah hopes to reduce political resistance by applying the economic reforms to Johor, an Umno stronghold and home to many of Malaysia's cabinet ministers.
“If we can show them that this policy will benefit them directly with increased foreign investment, they may accept more change. If we succeed in Johor, we can introduce the reforms elsewhere in Malaysia,” says one official.
Malaysia has followed a similar strategy in eroding the NEP by creating special economic zones that exclude affirmative action rules, including for manufacturing, information technology and financial services. But services remain a bastion of the policy when Malaysia wants to reduce its dependence on manufacturing.
Musa Hitam, a former deputy prime minister who sits on the Iskandar advisory panel, is proposing bolder reforms by suggesting the NEP should be abolished in the new economic zone.
Scepticism remains on whether Malaysia can follow through on its promises. Local bureaucrats have been accused of interfering with investment applications, such as placing limits on the hiring of foreign workers. Mr Abdullah has promised to unveil steps to strengthen central government supervision of local governments to prevent such problems.
The government also hopes to win local support by requiring foreign investors to contribute to a social welfare fund for Iskandar that would benefit mainly ethnic Malays, with officials saying that prospective foreign investors have not raised objections to the proposal.
Iskandar has set a target of attracting $105bn in investments over the next 20 years, including from the Middle East and Japan, to support the building of theme parks, retirement homes and universities in an area three times the size of next-door Singapore.
The biggest single source of investment could come from Singapore, since land and labour cost much less in Johor. But a surge of Singapore investments could also raise nationalist hackles in Malaysia. Bilateral ties have been prickly since the two ended a brief union in 1965.
Malaysia has already been forced to drop discussion of plans to introduce passport-free entry to Iskandar for foreigners because of local fears about a large influx of Singaporeans.
Chua Hak Bin, an economist at Citigroup in Singapore, says the proposed reform for Iskandar “enlarges the opportunities and economic space for Singapore” and could reverse a decline in cross-border trade and investment. Singapore has long sought to develop a cheap manufacturing hinterland based around Johor and the neighbouring Riau islands in Indonesia.
But Iskandar's emphasis on offering incentives for services instead of manufacturing “does not appear to be designed towards addressing Singapore's handicap: a shortage and high cost of land. On the contrary, the targeted services industries look more directed at competition with, rather than complementing, Singapore,” said Mr Chua. ¶ 1:18 AM
Thursday, March 29, 2007, FT
Abdullah Badawi, Malaysia's prime minister, has described the planned Iskandar Development Region in the southern state of Johor as playing the same role for Singapore as Shenzhen does for Hong Kong by offering a cheap place to do business.
But Iskandar also resembles Shenzhen as a laboratory to promote economic reforms, just as the Chinese special economic zone did in the 1990s.
Among incentives recently announced by Mr Abdullah to encourage foreign investment in Iskandar was the easing of affirmative action rules favouring the ethnic Malay majority, often seen as the biggest obstacle to attracting overseas capital.
Under what is known as the New Economic Policy, foreign investors are required to offer a 30 per cent stake in businesses to a local ethnic Malay partner. The government is to abolish the rule for selected service industries in Iskandar, including healthcare, tourism and education.
Christopher Woods, chief strategist at CLSA, says the announcement “is the latest and most dramatic piece of good news to come out of Malaysia”, which is also relaxing foreign exchange rules and scrapping property gains tax to promote capital inflows.
Officials connected with the project say the concessions are the cutting edge of broader reforms to reverse a drop in foreign direct investment, which fell by 14 per cent to $4bn (�bn, £2bn) last year.
The easing of affirmative action rules is likely to provoke a backlash from the ruling United Malays National Organisation, which has ruled Malaysia since 1957 based on its championing of rights for ethnic Malays and its policy to close the income gap with the ethnic Chinese minority.
Mr Abdullah hopes to reduce political resistance by applying the economic reforms to Johor, an Umno stronghold and home to many of Malaysia's cabinet ministers.
“If we can show them that this policy will benefit them directly with increased foreign investment, they may accept more change. If we succeed in Johor, we can introduce the reforms elsewhere in Malaysia,” says one official.
Malaysia has followed a similar strategy in eroding the NEP by creating special economic zones that exclude affirmative action rules, including for manufacturing, information technology and financial services. But services remain a bastion of the policy when Malaysia wants to reduce its dependence on manufacturing.
Musa Hitam, a former deputy prime minister who sits on the Iskandar advisory panel, is proposing bolder reforms by suggesting the NEP should be abolished in the new economic zone.
Scepticism remains on whether Malaysia can follow through on its promises. Local bureaucrats have been accused of interfering with investment applications, such as placing limits on the hiring of foreign workers. Mr Abdullah has promised to unveil steps to strengthen central government supervision of local governments to prevent such problems.
The government also hopes to win local support by requiring foreign investors to contribute to a social welfare fund for Iskandar that would benefit mainly ethnic Malays, with officials saying that prospective foreign investors have not raised objections to the proposal.
Iskandar has set a target of attracting $105bn in investments over the next 20 years, including from the Middle East and Japan, to support the building of theme parks, retirement homes and universities in an area three times the size of next-door Singapore.
The biggest single source of investment could come from Singapore, since land and labour cost much less in Johor. But a surge of Singapore investments could also raise nationalist hackles in Malaysia. Bilateral ties have been prickly since the two ended a brief union in 1965.
Malaysia has already been forced to drop discussion of plans to introduce passport-free entry to Iskandar for foreigners because of local fears about a large influx of Singaporeans.
Chua Hak Bin, an economist at Citigroup in Singapore, says the proposed reform for Iskandar “enlarges the opportunities and economic space for Singapore” and could reverse a decline in cross-border trade and investment. Singapore has long sought to develop a cheap manufacturing hinterland based around Johor and the neighbouring Riau islands in Indonesia.
But Iskandar's emphasis on offering incentives for services instead of manufacturing “does not appear to be designed towards addressing Singapore's handicap: a shortage and high cost of land. On the contrary, the targeted services industries look more directed at competition with, rather than complementing, Singapore,” said Mr Chua. ¶ 1:18 AM
