By Nigel Cory
Prime Minister Najib Razak, President Barack Obama and other leaders from countries involved in negotiating the Trans-Pacific Partnership meeting on the margins of the ASEAN Summit at the Peace Palace in Phnom Penh, Cambodia on November 20, 2012. Source: Wikimedia, used under a creative commons license.
Prime Minister Najib Razak deserves credit for his perseverance in pursuing an often difficult political, economic, and social reform agenda, notwithstanding the daunting task of helping Malaysia cope with the loss of its second passenger plane in five months. His commitment to reforms stems from his conviction that without these reforms, Malaysia risks falling into the middle-income trap and failing to reach high-income status by 2020, a goal set by Najib and his predecessors. Yet Najib has faced fierce opposition to his drive to reform the economy and join the Trans-Pacific Partnership (TPP) trade agreement from various quarters, including his own party, the United Malays National Organizations (UMNO), the Pakatan Rakyat-led opposition coalition, and an increasingly skeptical public. This raises the question about whether the difficult and unpopular economic reforms that will be required under the TPP are a bridge too far for Najib.
The impact of implementing economic reforms has not been easy for Najib. On the domestic front, his reform program has focused on cutting fuel subsidies, establishing a goods and services tax (GST) that will go into effect in April 2015, and introducing a minimum wage. Najib has also eliminated the subsidy on sugar and cut electricity subsidies, on the grounds that these are fiscally unsustainable – Malaysia’s budget deficit in 2013 is 4.5 percent of gross domestic product (GDP), one of the largest in Asia – and undermines the country’s competitiveness. Cutting these subsidies is forecast to reduce Malaysia’s long-running fiscal deficit to 3.5 percent of GDP in 2014 with the aim of eliminating it by 2020. International investors and credit rating agencies have all praised the government for launching these reforms.
Yet, while Najib’s administration has tried to use different tools at their disposal to help ease the impact of reforms, such as sector-specific exemptions and phase-in periods, Malaysian voters have not been pleased. Najib’s approval rating on managing the economy hit an all-time low of 52 per cent in April, while his disapproval rating was at its highest of 44 per cent, according to an opinion poll conducted by the independent Malaysian polling firm Merdeka Center. In a separate December poll, more respondents said Malaysia was heading in the wrong direction for the first time and that economic issues, especially rising costs of living, were driving this pessimism.
On the international front, the TPP trade agreement presents another difficult roadblock for Najib as its ambitious scope has raised the prospect of a domestic backlash in Malaysia. Portrayed as a comprehensive 21st-century trade agreement, the TPP is expected to regulate a range of areas beyond the usual focus of trade agreements on tariffs, including government procurement processes, intellectual property rights, investor-state dispute settlement mechanisms, state-owned enterprises, and labor and environmental regulations. These areas have been the source of contention behind Malaysia’s position at the negotiating table as well as between the Najib government and the domestic public.
Nonetheless, the most serious threat for Najib’s TPP drive likely comes from the conservative faction within UMNO. The debate surrounding the implications of TPP goes to the heart of UMNO politics as it would likely change Malaysia’s procurement process that has long favored ethnic Malay firms, a cornerstone constituency for UMNO. Former prime minister Mahathir Mohamad, who was responsible for setting up this procurement policy, has publicly called for Malaysia to withdraw from the TPP.
Given the current political climate, it remains to be seen whether the difficult reforms necessary for joining the TPP would be a step too far for Najib. While he has stayed the reform course thus far, Najib has been under growing pressure to water down Malaysia’s position on the TPP or back down on economic reforms. On the other hand, if he succeeds in striking a deal on the TPP, Najib will have an equally challenging time selling it to an increasingly critical party and domestic audience. His political survival, as well as progressive vision for Malaysia’s economic future, may be at stake however the situation plays out.
Mr. Nigel Cory is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS. He previously served as an Australian diplomat in Malaysia.
