The political economy of the asean free trade area (afta)

the country, became vital while IMF reforms made it difficult to translate economic 

nationalist ideas to firm policies.

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Malaysia 

In the case of Malaysia, the political salience of domestic capital is tied up with the 

country’s long-standing ethnic politics, as well as with the broader economic nationalism 

of Prime Minister Mahathir that emerged in the late 1980s.  Between 1970 and 1990, a 

state-directed development programme – the New Economic Policy (NEP) – drove the 

Malaysian political economy.  The NEP was the outcome of ethnic riots following the 

May 1969 general elections caused by the majority Malay community’s concerns at their 

economic marginalisation and fears that they would lose their political dominance to the 

relatively better off minority ethnic Chinese community as a result.   

 

Among the objectives of the NEP was to create a Malay business (and middle) 

class and to achieve a target of 30 per cent Malay equity in the corporate sector.  The NEP 

was vital to the legitimacy and security of the UMNO-dominated regime, since it enabled 

both a more equitable distribution of wealth for the Malays as well as Malay political 

dominance through control of economic resources.  The United Malays National 

Organisation (UMNO) has long been the leading Malay party in Malaysia, regarded as the 

champion of Malay political rights in multiethnic Malaysia.  Although the NEP was 

replaced by the National Development Policy in 1991 that scaled back ethnic preferences, 

the goal of creating a Malay business community continued to be emphasised in the 1990s 

(Tori, 1997: 236).  Even the privatisation programme undertaken as part of the economic 

restructuring package adopted in response to the mid-1980s recession was actively used to 

create a Malay business class to fulfil the NEP goal (Crouch, 1996: 39).  Privatisation 

largely benefited UMNO-linked Malay businesspersons, although a number of ethnic 

Chinese and Indian businesses gained as well.  This group, in turn, became a valuable 

source of political and material support for various UMNO political leaders, including the 

Prime Minister (Gomez, 1996).  By the late 1990s, therefore, this politically influential 

rentier domestic business community had become part of the governing elite (Khoo, 2000: 

221).   

                                                 

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 In any case, it is not clear that developmental regionalism through the AIA would have been feasible as a 

means to help develop indigenous Indonesian capital.   It was more likely that the larger, more advanced 

ethnic Chinese businesses would have been the project’s main beneficiaries. 

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The new Malaysian conglomerates that emerged out of privatisation and other 

preferential policies were also a key component of the wider economic nationalism of the 

Prime Minister.  Especially after the mid-1980s recession, policy had moved beyond the 

NEP’s narrow focus on building a Malay capitalist class to advocate the growth of large, 

Malaysian firms (which would include ethnic Chinese and Indian firms as well) as a 

means of meeting the competitive challenges of the global economy, although NEP goals 

remained salient (Khoo, 2000: 216).  The policy shift reflected the strategic vision of the 

Prime Minister, who had never been content with Malaysia remaining a Third World 

producer of industrial commodities.  Thus, he stressed the building up of Malaysian 

corporations and conglomerates able to compete with foreign TNCs in what was perceived 

to be an intensely competitive world economy.   

 

Since foreign firms were dominant in the far more efficient, export-oriented 

manufacturing sector, it was in the non-manufacturing sectors that domestic capital, 

including ethnic Malay capital found its niche, using market restrictions as well as access 

to preferential treatment through political connections as a means to profits (Khoo, 2000: 

218).  As already noted in a previous section, the expectation among policymakers was 

that global rules would eventually allow foreign corporations unrestricted access to the 

domestic market.  It was clear that Malaysian firms, including the politically privileged 

ones, would eventually have to compete with global firms, not only in international 

markets but in the domestic market as well.  If politically important domestic firms were 

not ready for global market competition, their demise would have significant political 

repercussions for the NEP goal of advancing a Malay business class, for Mahathir’s 

personal authority, and ultimately for the stability of Mahathir’s ruling coalition as well as 

the security of the UMNO-dominated political system.  The developmental role envisaged 

for the AIA by the Malaysian side was, therefore, intimately related to ensuring the 

survival of the domestic firms that were key players in the Malaysian political economy. 

 

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The Growth Imperative Overwhelms: Reviewing the AIA 

 

In September 2001, the ASEAN governments agreed to remove the disparity in the 

AIA between foreign and domestic/ASEAN investors in the non-manufacturing sectors, 

thus offering foreign investors full market access and national treatment privileges by 

2010 rather than in 2020.

34

  How do we explain this policy shift? 

 

Although the AIA had been adopted in October 1998, right in the throes of the 

financial crisis, it was at that time not expected to adversely affect manufacturing sector 

FDI since its discriminatory effects were largely, though not solely, confined to the non-

manufacturing sectors.  It was the flow of FDI to the manufacturing sector that was 

considered to be crucial during this period, since it had been the main engine of growth 

and exports in ASEAN from the mid-1980s, and was believed by political leaders to be the 

main means of recovery from the crisis.  Some member country officials as well as the 

ASEAN Secretary General believed that the AIA as it was then designed would jeopardise 

the inflow of FDI during such difficult times when the liberal reformist credentials of 

member governments were at stake.

35

  Nevertheless, the latter continued to maintain the 

AIA in its ‘original’ form.  Instead, member governments accelerated CEPT tariff 

liberalisation in 1998 as a means of reassuring foreign investors that they were committed 

to realising the single regional market, the main ‘carrot’ used to attract FDI flows to 

ASEAN.  Member governments also temporarily relaxed investment restrictions for a one 

to two year period in selected manufacturing sectors in their respective countries as a way 

of maintaining investor interest in the region, as already noted.   

 

Nevertheless, member governments agreed to a one year study on the AIA 

beginning in August 2000 in view of the report presented in July 2000 by the ASEAN 

Secretary General that revealed a fall in investment into ASEAN from US$28 billion in 

1997 to US13 billion in 1999.

36

  Moreover, the report also showed that the ASEAN 

economies received only 17 per cent of FDI flows to Asian developing countries in 1999, 

compared to about 60 per cent in the early 1990s.  China, on the other hand, received 

about 60 per cent in 1999, up from 18 per cent during the early years of the decade.  The 

                                                 

34

 Joint Press Statement, Thirty-third ASEAN Economic Ministers Meeting, 15 September 2001. 

35

 Business Times, ‘ASEAN set to liberalise investment within region’, 30 September 1999. 

36

 International Herald Tribune, ‘Investment in Southeast Asia plunges’, 27 July 2000.  Later information 

revealed a higher 1999 figure of US$16 billion.  See UNCTAD (2000). 

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