The Collapse of Malaysia’s Middle Class

On July 12, 2021, Malaysia’s New Economic Policy (NEP), an emblem of developmentalist growth credited with creating a national middle class, marked its 50th anniversary.

The very next day, Malaysian Finance Minister Tengku Zafrul Aziz published a column in Singapore’s Straits Times arguing that the nation whose COVID-19 National Recovery Plan he leads is not a failed state. A couple of days later, Minister of Science, Technology and Innovation Khairy Jamaluddin told Australia’s Sydney Morning Herald that while his government “could have done certain things better,” their vaccination program was on track after procuring more Pfizer supplies.

This international media campaign was, perhaps, understandable. A few days earlier, Bloomberg journalist Daniel Moss had argued that Malaysia is “beset by multiple crises – social, economic, and political – fed and worsened by each other. It may only be a slight exaggeration to invoke the dreaded label of a failed state.” The provocative article led to an outpouring of reactions from disillusioned Malaysians, circulating on WhatsApp and social media channels, where it was seized upon by opposition politicians who used it to highlight the government’s weaknesses under Prime Minister Muhyiddin Yassin. A few analysts worked to debunk the claim, including Sharifah Munirah Alatas, who argued that only a “captive mind” would “cut and paste” the failed state concept from other, more challenging scenarios – like Haiti, say – and apply it uncritically to a nation like Malaysia.

Yet there seems to be a process of decomposition at work in Malaysia, albeit one that might yet be arrested, if not immediately reversed, by the pickup in speed of Khairy’s vaccine rollout. On the very same day as Khairy’s interview, Malaysia’s COVID-19 case numbers reached a new record daily high of 13,215, before falling back in line with its most recent seven-day average of 11,993. Reports emerged that Malaysia’s engine of productivity and economic growth, the urban and industrial conurbation known as the Klang Valley, was at the point of a health system breakdown, its public hospitals treating people on canvas beds in carparks, rubbish strewn all over their floors. According to doctors and other health workers, patients were coming in sicker than ever, and more likely to need ventilators, some dying shortly after arriving. Stories of health worker burnout – aired by civil society coalitions like Projek Bangsa Malaysia – had begun to go viral, and military and private hospitals had stepped in to assist, supported by 100 million Malaysian ringgit ($23.6 million).

Meanwhile, more than 200 staff in a Shah Alam vaccination center were found to be COVID-positive, while contract doctors, perceiving their newfound bargaining power, threatened to strike for permanent jobs and better pay, despite the dangers of political action under emergency rule.

Malaysia’s state of emergency began in January, and was scheduled to expire on August 1. It was not a military coup, as Muhyiddin announced to the worried public, but instead a health intervention. It still effectively suspends citizens’ political rights. According to the state of emergency’s founding ordinance, no “action, suit, prosecution, or other proceeding” can be brought against the government – whose majority in Parliament might have collapsed – or its officers or appointees, for the emergency’s duration. Parliament is nevertheless also suspended, although after a dramatic royal intervention, it met for five days starting July 26, but only to consider Tengku Zafrul’s National Recovery Plan, a four-step outline for Malaysia to progressively remove restrictions and open up its economy. This was the nation’s third emergency – its very independence was declared during the first of them – while its second was triggered in 1969, first by an election, followed by an anti-Chinese pogrom.

Returning to the striking doctors and the question of pay, data from Malaysia’s Salaries and Wages Survey Report reveals that employee salaries fell by an average of 9 percent in 2020 – from 3,224 ringgit to 2,933 ringgit – owing to a series of extended lockdowns since the onset of the pandemic, none of which reduced case numbers. In July, Ameer Ali Mydin, managing director of a hypermarket chain bearing his name, was nearly in tears when he told online media channel KiniTV that while more theft is taking place in his stores, thieves are no longer stealing high-value items like speakers and televisions to sell for quick cash. Rather, they are stealing fish and basic vegetables, while sales of instant noodles, the cheapest of the cheap non-nutritious stomach fillers, are going through the roof. “It’s sad,” he practically sobbed. “And I have to catch them,” he continued, referring to his obligation to report shoplifters.

Many Malaysians are indeed struggling for food, with some relying on aid packages delivered by members of Parliament, often with their pictures and party logos on the boxes and cheap carbohydrates – rice, sugar, flour – inside. There are no vegetables or protein, apart from eggs in certain cases. Yet food banks run by MPs outside the government coalition, Muar’s Syed Saddiq Abdul Rahman and Segambut’s Hannah Yeoh, have been forced to close, with Yeoh reporting a crowd of more than 800 people lined up outside her office on the day she made her decision.

Unable to access useful forms of help from state agencies and elected representatives, many Malaysians have taken matters into their own hands, drawing on community members and civil society groups. Some Malaysians are raising white flags outside their flats or houses, a sign that indicates they need help – usually food or money, perhaps transportation. Others are volunteering to help, including using an app that a group of students quickly built to support mutual assistance efforts.

There is no sugar-coating the situation: Many Malaysians are either sliding into poverty, while those who were already in poverty before the pandemic are watching their prospects grow even worse. In June, sounding exasperated, former government adviser Muhammed Khalid argued on national broadcaster Astro AWANI that Malaysia has lost its middle class. “There are no more savings,” he said, not for asset accumulation, and not for investing in education. Indeed, many Malaysians have even drawn down their superannuation savings to top up their reduced or non-existent wages, cleaning them out of pension funds for when they grow old.

As if to confirm the grim diagnosis, the prime minister’s Economic Action Council (EAC) announced a short time later that more than 600,000 Malaysian households had “slipped” from the nation’s “middle 40 percent” (M40) into a lower income bracket. This bracket used to cover only the “bottom 40 percent” (B40) of households, which the EAC assumed were earning less than 4,850 ringgit a month. Yet now, the category covers the B40 plus 600,000 households.

Nor is it only wage earners feeling the pinch. The World Bank has found the median Malaysian company has only two months’ worth of cash available to pay bills. Small and medium enterprises are feeling it the worst, and more than half the respondents to the World Bank survey are either far behind in their debt repayments or they face the risk of falling into arrears.

With its middle class sliding backward into poverty, and, arguably, toward its demise, what kind of birthday is this for the NEP? And what of the poor – the B40 – now increasingly left without even nutritious food as the pandemic, and its associated recession, push them further into despair?

A New Economic Policy Born of a National Emergency

The NEP was born in 1971. It was tabled in Parliament as part of the Second Malaysia Plan (1971-1975), after being drawn up during the nation’s last emergency. It was developed in response to a serious national trauma, namely the 1969 election, which severely weakened the United Malays National Organization (UMNO) and its Alliance coalition government, and the riots in Kuala Lumpur that followed soon afterward. According to official figures, 196 people were killed, 143 of them Chinese, although the numbers remain hotly disputed. Like every other round of social trauma since the colonial period, 1969 was both enacted and understood in racial terms. It has left an indelible imprint on the thinking of Malaysian governments since, convincing them that strong economic growth, successful social and economic restructuring, and the experience of social cohesion are forever, inextricably, linked.

The emergency lasted from 1969 to 1971, with Parliament suspended for the entire period. During that time, the nation’s federal cabinet was replaced by a National Operations Council (NOC), a body that has been proposed again in 2021 as a way to resolve the nation’s economic and social impasse.

The NOC, according to Malaysian historian Cheah Boon Kheng, “functioned very much like the semi-martial law colonial government” of the first emergency, a period of spectacular violence piled atop the traumas of World War II, the Japanese occupation, and the British return. The first emergency cleared the ground of any trace of Malaya’s Communist Party, along with the rest of the national Left. After killing an estimated 11,000 guerrillas, troops, and civilians, deporting around 20,000 people, and forcibly relocating as many as 500,000 more, the colonial government delivered the state into the care of UMNO and the Alliance in 1957, after an election held in 1955.

Well on the road to becoming an anti-communist bulwark in Cold War Southeast Asia, Malaya soon received assistance from the International Bank for Reconstruction and Development (now part of the World Bank). It was quickly set on a path of rapid development through the 1960s, when it aimed to raise living standards and diversify the economy away from primary exports and toward secondary manufacturing. It quickly expanded the provision of social services including health care and education, and perhaps above all, it sought to ensure that economic growth continued quickly enough to deliver on the Malayan public’s hopes for peace and prosperity. The economy and labor market, however, were racially segmented, with Malay Muslims concentrated in rural occupations, like agriculture and fishing, Chinese concentrated in cities working in small and large businesses, and many Indians at plantations. Professional circles consisted largely of minorities.

Further, growth did not always keep pace with Malayans’ development aspirations. New rounds of rapid, dislocating change continued. By 1965, the nation’s very composition had already changed twice and its name had changed to Malaysia – owing to a merger with Sabah and Sarawak and a split from Singapore – all while repelling an Indonesian invasion known as Konfrontasi. Each of these nation-defining changes continued to transform the country’s demographics, economic prospects, and political dynamics.

In 1968, Malaysia also began putting down a second communist insurgency. This second campaign is sometimes referred to as the “Second Emergency,” which remained undeclared in the interest of not further traumatizing the public after three decades of insecurity. By 1969, according to Malaysian development economist K.S. Jomo, the Alliance had demonstrably failed to alleviate poverty in general or, specifically, the poverty of rural Malay Muslims, nor had it contained rising inequality, landlessness, and unemployment. The nation’s education system and economic structure remained racially striated, with less than one-third of the population working in modern industries. Meanwhile, within the Alliance and the broader national elite, there was growing dissatisfaction about the continuing dominance of Chinese and foreign capital.

All these factors contributed to the crushing electoral blow dealt to the Alliance, which won the 1969 election, albeit with the votes of only half the nation’s Malay Muslim voters and only one-third of the votes of its minorities. The pogrom that came afterward was more decisive in determining how the result was interpreted than the result itself. Malay Muslims needed protection, and further, assistance, in a society and economy that had left them behind.

The government’s response to 1969 was, in short, to fashion a new Malaysian middle class, which would both grow in overall size and also be structured to reflect the nation’s racial composition. The nation’s elite would also be restructured, in line with advice developed by Just Faaland for Harvard University’s Development Advice Service. Alongside the NOC, the government also established a National Consultative Council (NCC), which, while no more democratic or transparent than the NOC, took a contrasting approach from it in seeking to create a new national consensus. It included handpicked leaders from Malaysia’s constituent “races,” as well as political parties, media organizations, religious groups, business associations, and trade unions. During this period, the government also established a Department of National Unity (DNU), which drew up the NEP as a means of correcting the nation’s distributional problems left by colonial rule and the policies of the Alliance.

The goals of the NEP were to “eradicate poverty among all Malaysians, irrespective of race” and to “restructure Malaysian society in order to correct racial economic imbalance, in the context of an expanding economy.”

The DNU saw these goals as key to restoring and maintaining “national unity” for the long term, although for many members of Malaysia’s minorities, the NEP seemingly set up a racial zero-sum game for access to opportunities. For many, the best response was migration to other countries, fuelled by the beginnings of a transformation inside UMNO, led by a new crop of Malay Muslim ultra-nationalists like Mahathir Mohamad – so extreme in his views that he was expelled from the party in 1970-71. As Jomo has pointed out, reactions to the NEP are themselves structured by race. “Both sides,” he has argued, referring to Malay Muslims on the one hand and minorities on the other, “unashamedly invoke their respective ethnic perceptions of justice” when they talk about it.

Despite the way it fueled resentment, however, the NEP was a success in almost every respect through its initial 20-year period, assuming its aims and targets are understood on their own terms. It drove increases in employment opportunities and income, while successfully reducing the identification of race with economic function in the context of generally rapid growth and low inflation. It reduced the share of the population in absolute poverty from 52 percent in 1970 to 17 percent in 1990, distributing the benefits of growth widely across the population, creating a multiethnic, and not only Malay Muslim, Malaysian middle class.

But in the context of that wider success, the NEP also genuinely restructured access to social mobility. One aspect of that restructuring was its investment in developing the human capital of a group it called the bumiputera (sons of the soil). This term encompassed Malay Muslims, the true targets of the policy, while also including other Malaysians who could not be presented as privileged or colonial-era migrants, namely indigenous people from the Peninsula, Sabah, and Sarawak. Malaysia’s government rapidly expanded access to tertiary education, including by introducing scholarships and expanding the education system by creating new institutions. Its aim was to enable greater productivity and enhance mobility between economic sectors by transferring many bumiputera from the economy’s primary sector to its secondary sector. So successful was this drive that by 1990, the proportion of bumiputera in the secondary sector almost equalled that of minorities, while in the tertiary sector, this proportion had already become greater. The primary sector’s share of the economy declined from 37 percent in 1970 to 20 percent in 1995, while the secondary sector’s share grew from 17 percent in 1970 to 36 percent in 1995. Bumiputera representation in the professions grew by a factor of five.

This transfer also produced significant rural-urban migration, which, over time, has made Malaysia a largely urban nation. This shift has eroded any material basis for the political myth that Malaysia’s rural, agricultural areas are its true voter “heartland,” whereas its cities and suburbs are home only to the minorities and the privileged. At the same time, however, the authorities did not neglect to improve outcomes for Malaysians living in the nation’s hinterlands. The federal government and its rural development agencies began investing in rural improvements, including roads, irrigation systems, social services, land-clearing to create new rural communities, and improvements in access to piped water and electricity.

Inequality Grows, Both Political and Economic

The NEP did not cease in 1990, despite meeting or making good progress against most of its targets. Instead, its approach has been replicated in the various programs that have succeeded it, including the National Development Policy (NDP, 1991-2001) and Vision 2020 (2001-2020). Politically, the most important target it did not meet was that of wealth restructuring so that 30 percent of shares were owned by bumiputera by 1990, although at the time, Jomo considered the question unresolved owing to difficulties in making such calculations.

Either way, such questions, of course, only consider the interests of a tiny elite, and in social and economic terms, the NEP’s greatest failing is likely its poor legacy in addressing inequality overall. While it did reduce gaps from the late 1970s onward, from 1990, overall inequality began to increase again, and was highest of all in the group the NEP was designed to uplift – bumiputeras. This reversal was likely linked to poor performance in the agricultural sector and the 1980s campaign of liberalization, deregulation, and privatization, alongside shrinking subsidies and income support to those in extreme poverty adopted in response to worsening economic conditions. It may also have been linked to the growing influx of migrant workers, both legal and illegal, their low wages used to suppress wages for unskilled workers and contributing to outsized resentment against these migrants in many parts of the community.

Nevertheless, the NEP and its successor plans enabled widespread acceptance of the trade-offs embedded in Malaysia’s political system, allowing most Malaysians to share in the benefits of growth even while deliberately engineering a process in which those benefits were unevenly distributed along racial lines. After all, according to Malaysian sociologist Sharon Siddique, “in the ever-expanding-pie scenario, everyone’s slice would grow, even if some received slices that were slightly more generous than others.”

And the pie did expand, fuelling a new economy of consumption on discretionary purchases of goods and services such as fashion items and food consumed outside the home, as well as positional or status goods such as upgraded accommodation and vehicles. Arguably, however, the NEP approach has also failed at achieving true “national unity.” Conversely, the circumstances it created conditioned the social impact of the authoritarian Malay Muslim populism driven by politicians like Mahathir, generally allowing racial and religious electoral outbidding to remain contained within the bounded realm of politics without leading to violence.

This populism meant there has been no attention paid to the NEP’s goal of boosting Chinese recruitment in the civil service, a sector where minorities have historically been underrepresented. It has also provided cover for increasingly differentiated citizenship for Malay Muslims on the one hand and minorities on the other, while increasing the state’s capacity for majority/minority boundary policing by Islamizing select aspects of public life. In addition, it has legitimized the growth of political patronage, multiplying numbers of political appointees in government-linked companies, for example, and assisting the politically linked to secure lucrative contracts for themselves.

Malaysia’s Future and the NEP’s Legacy

Fifty years after the NEP was introduced, Malaysia has a real-time experiment in how resilient a nation’s social cohesion can be in conditions where the ever-expanding pie is rapidly collapsing in on itself. The economy contracted by 5.6 percent overall in 2020, including by around 17 percent in the second quarter, while in the first quarter of 2021, it is down by 0.5 percent. Even before it collapsed in February 2020 after the so-called “Sheraton Move,” the previous Pakatan Harapan government led by Mahathir launched an economic stimulus package worth 20 billion ringgit to mitigate the pandemic’s impact on household income.

Since succeeding him as prime minister, Muhyiddin has announced hundreds of billions of ringgit in social protection and stimulus packages with names like PRIHATIN (“compassionate” or “caring”), PENJANA (“generator”) and most recently, PEMERKASA (“strengthener”) and PEMULIH (“restorer”). Despite the names, these packages do not make enough of a difference for those literally raising white flags, and meanwhile, there seems to be no end to Malaysia’s protracted political crisis in sight.

At the same time, with August 1 marking the expiration of the 2021 emergency, the political field is still in turmoil. Muhyiddin’s government lacks legitimacy, and possibly even a majority after the UMNO announced it would end its support for the government, even while UMNO MPs hold key positions in its cabinet.

As Malaysian political historian Ooi Kee Beng has pointed out, it seems that “all the major Malay leaders active since the late 1980s have fought each other to a standstill.” There is neither enough momentum for change nor is there any growth holding the status quo together. Malaysians are despondent, although some observers, seemingly hoping to preserve some sense of optimism, are arguing that perhaps the nation’s youth might orchestrate a political breakthrough. Or they might not.

Others have called for Malaysian leaders to somehow look past their self-interests. Former banker, capital fund manager, and son of Tun Abdul Razak, the prime minister who launched the NEP in 1971, Nazir Razak has called for a second National Consultative Council, this time based on the principles of deliberative democracy, to thrash out a new national consensus. Yet voluntary participation by Malaysia’s parliamentarians in such a scheme is difficult to imagine. Meanwhile, Malaysia has plans to raise its debt ceiling to 65 percent of GDP, suggesting more stimulus is in the cards. The economy is expected to lose 1 billion ringgit ($236 million) in income per day during the present lockdown.

On its 50 birthday, the NEP, an emblem of developmentalist growth, an engine of demographic transformation, and a model for maintaining social cohesion, appears to simply have broken down.