After Abdullah Ahmad Badawi became Malaysia's deputy prime minister in January 1999, citizens who couldn't wangle a place on his official calendar found another way to get his ear. They gathered at his house on the outskirts of Kuala Lumpur until Badawi invited them in for coffee or orange juice and a chat.
Badawi held these informal get-togethers with ordinary Malaysians because he "felt they were his supporters and constituents, so he had to listen to their problems," says a close friend, Mohamed Abid, director of brokerage TA Enterprise.
Badawi's common touch and genial nature have earned him the nickname of the "Mr. Nice Guy" of Malaysian politics. But he will soon gain a more portentous title: prime minister. This October the 63-year-old is to succeed Dr. Mahathir Mohamad, the patriarch of Malaysian politics who in two decades has turned his country into an economic powerhouse, but at the price, some critics have complained, of stern rule. "I'm brash and abrasive," Mahathir told a Reuters correspondent in 1995. "But that's because I've noticed when people are nice and polite, they never get anywhere."
Polite to a fault, Badawi is a consensus-builder rather than an order-giver. An aide to Badawi calls him simply "the best boss in the world." In a wide-ranging interview with Institutional Investor (see box, page 46), Badawi said of his political approach: "For me decisions based on consensus are important. If a decision is not based on a majority, then those who were opposed to it can continue to oppose it. If they are part of the consensus, they cannot say I disagree with this or had nothing to do with it."
Is this what Malaysia needs now, with the global economy stalled, China breathing down Malaysian manufacturers' necks and ethnic tensions simmering as always just below the surface: a really nice guy?
Undeniably, Badawi's amiable style has served him well. Following a series of senior civil service jobs, he was elected to parliament at 38 in 1978 as a member of Malaysia's dominant political party, the United Malays National Organization. UMNO leads the Barisan Nasional, or National Front, coalition of regional and ethnic-based political groups that controls two thirds of the seats in Parliament. His government experience is extensive. Badawi has run Malaysia's Education, Defense and Foreign Affairs ministries, and he was party vice president before being named deputy prime minister and Home Affairs minister. Says a onetime political foe, former junior minister Ibrahim Saad, "You don't want him as your rival because he will be a gentleman even when you are trying to irritate him."
Yet skeptics wonder whether agreeable Badawi can contend with the volatile mix of perils and opportunities confronting Malaysia as an emerging-market country with high hopes of joining the First World club of developed nations. Mahathir has in fact made developed-country status by 2020 an explicit goal. Can Badawi endlessly extend robust economic gains as the iron-willed Mahathir has done? Will he address the country's democratic shortcomings?
One writer has damningly labeled Badawi the Malaysian Jimmy Carter, a reference to the earnest U.S. president of the late 1970s who served just one term and, fairly or not, became a symbol of well-meaning but ineffectual American government. The writer, M. Bakri Musa, a Malaysian-born American physician, bluntly questions whether Badawi has the right stuff for the job. "The only redeeming quality of the man, apart from his legendary honesty, is his humility," Bakri wrote in 1999. "He does not exactly exude physical or mental vigor."
Badawi supporters wave off such criticism. Someone who can't make tough decisions would never have survived -- let alone succeeded -- in Malaysian politics, they say. "He is soft on the outside, but he can make hard decisions when he has to," asserts Nor Mohamed Yakcop, Mahathir's special economic adviser, who has worked closely with the prime ministerdesignate and is sure to play a key role in his administration (see box, page 48). Badawi will show his true mettle when Mahathir steps aside, say backers.
"People are underestimating him," contends Michael Yeoh, executive director of the Asian Strategy and Leadership Institute, a Kuala Lumpur think tank. "He'll surprise people with what he does." Adds a Kuala Lumpur banker: "Badawi is lying low. You will see his true self when he comes to power. If he highlights his ideas now, it will create problems with the leadership. He isn't [called] Mr. Nice Guy for nothing."
Badawi's ideas, at least on the economic front, aren't likely to send him off in bold new directions. As he told II, "I am a firm believer in the saying, 'If it ain't broke, don't fix it.'" He emphasizes that in succeeding Mahathir, he is following a fellow UMNO party member whose policies he has long supported, not an opposition leader bent on a radically different course.
Badawi is in fact expected to rely heavily on Mahathir economic adviser Nor Mohamed, who states flatly, "There will be no change in our philosophy or our economic strategy." That suggests that Badawi will persist with the Mahathir initiatives -- such as pegging the ringgit to the dollar -- that were instituted at the time of the Asian financial crisis. "Right now we really don't see any reason to tinker with the peg [currently at 3.8 ringgit to the dollar]," says Nor Mohamed. "It has served us well for over four years, and we believe it continues to serve us well."
Foreign investors might have a different perspective. To stabilize the currency, and the economy, during the crisis, Mahathir not only linked the ringgit to the greenback but, as part of a capital-control program that forbade foreign investors and businessmen from taking more than token amounts of currency out of the country, also proclaimed that it could not be converted into other currencies. That stopped foreign hedge funds from shorting the ringgit or Malaysian stocks and blocked investors from repatriating currency gains. (In case anyone doubted his will, Mahathir called hedge fund legend George Soros a "moron" and a "criminal" for his foreign currency speculations; Soros heatedly retorted that Mahathir was a "loose cannon.")
This draconian program worked in the short term for Malaysia; the economy rebounded 5.4 percent in 1999. But foreign investors are now wary. For instance, the California Public Employees' Retirement System (with $130 billion in assets) has put Malaysia on its "forbidden list" of stock markets subject to shareholder abuse. In 1996 foreign investors held the equivalent of 35 percent of all Malaysian stocks; in 1998 the figure was 23 percent, and at the end of 2002 the proportion had dropped to 18 percent. The Kuala Lumpur exchange's total market capitalization -- about $110 billion -- is less than half its precrisis peak.
Many investors plainly continue to balk, despite Malaysia's recovery. Mark Mobius, head of emerging markets at Franklin Templeton Investments, sees no compelling reason to jump back into the Malaysian markets. "I am not so much concerned about the peg or capital controls, which they have largely lifted," he says. "I am more concerned about corporate governance. They have done a lot in terms of corporate restructuring and reforms, but their problem is implementation. They seem to take two steps forward and one or two steps backward." Badawi will need to overcome such hesitancy to entice investors back.
Will he also be strong enough to say no to importunate Malaysian business leaders? How he handles that situation "is the most difficult challenge for him," says former deputy prime minister Musa Hitam. The trick will be to place limits on the corporate bosses' influence without alienating them altogether, say Badawi partisans.
Keeping businessmen at bay and reassuring foreign investors are just two of Badawi's tasks. An even more pressing one will be adapting Malaysia to meet China's competitive challenge. In a telling comment, Ash Bhardwaj, the Asia-Pacific chief of Singapore's Flextronics International, the world's largest contract maker of electronics products, notes that "Malaysia is a big part of our Asian manufacturing strategy, but China is an even bigger part."
Malaysia is especially vulnerable to its rival because it depends so heavily on direct investment by foreign multinationals and on mass manufacturing of exports. Malaysia's is now the third-most trade-dependent economy in Asia, after Singapore's and Hong Kong's. "In a nutshell, Malaysia needs a new economic model," argues Morgan Stanley's Lian. Badawi and Nor Mohamed are hardly likely to throw out Mahathir's tried-and-true export-based economic model. Nevertheless, they expect to press ahead with a multifaceted response to the China threat. Kuala Lumpur is trying, for instance, to both build and attract biotech and other high-tech businesses that require better trained staffs and more advanced equipment than China can offer.
Malaysia also intends to emulate South Korea in creating more of a consumer-driven economy. Kuala Lumpur has cut taxes and liberalized the rules for borrowing from pensions to give Malaysians more spending power. Economists expect private consumption to grow 4.6 percent this year, after a 4.2 percent rise in 2002. "For too long we have been a nation of savers," says Nor Mohamed. "We can afford to spend a little more."
Badawi and Nor Mohamed also want to push Malaysia further into tourism, in part by playing off Muslim solidarity. "As a moderate Muslim country, Malaysia believes it has an edge over other Southeast Asian countries like [largely Buddhist] Thailand that are also trying to lure Arab tourists," says Tourism minister Abdul Kadir Sheikh Fadzir. Malaysia attracted 13.3 million tourists who spent $17.6 billion last year, and tourism now ranks as the second-biggest contributor to GDP (at 19 percent), behind electronics. Similarly, Malaysia hopes to become a medical center for Middle Easterners and Southeast Asians who can pay for the most sophisticated care but don't want to go to the West for treatment.
Applying the same logic, Badawi and Nor Mohamed envision Kuala Lumpur emerging as a major Islamic financial center for Middle Eastern investors (retail and institutional alike) who have hitherto entrusted their money to Western financial institutions. The reasoning: Muslim investors are upset about the financial restrictions put in place by the U.S. and other Western countries after September 11 and worried that their assets in the West might be frozen if a new conflict erupts. Thus they'll choose a Muslim safe house, like Malaysia, for their funds.
Badawi's ambitious agenda is worthy of a Mahathir -- and, indeed, it is largely the current prime minister's own blueprint tweaked and teased. But does the prime ministerto-be have the fortitude of a Mahathir to carry out his plans?
Consider what Mahathir has accomplished during his 22 years in power. A former physician, he weaned Malaysia from near-total dependence on farm goods and commodities like oil and rubber, turning it into a manufacturing state. Today the country is the world's largest exporter of computer hard disc drives and one of Asia's biggest assemblers of consumer electronics products. Mahathir's controversial megaprojects -- airports, highways, telecommunications facilities -- struck some as grandiose, but they did help to persuade multinationals like Acer, Flextronics International, Intel Corp., Sharp Corp. and Sony Corp. to set up manufacturing operations in the country. Malaysia's export-driven economy has grown 7 percent a year on average during Mahathir's reign. The prime minister wisely pursued economic diversification to create "one of the more resilient economies in Asia," as former Credit Suisse First Boston Southeast Asia economist P.K. Basu describes it. Malaysia, he says, is the "quiet achiever in the region."
Malaysia has one of the highest standards of living in Asia. Its GDP per capita of $3,800 lags only Singapore's in Southeast Asia and is twice that of Thailand. Malaysia stands fifth among all Asian nations in income per capita, behind Japan, South Korea, Taiwan and Singapore.
Mahathir's legacy has a less appealing side, however. In the most controversial episode, Badawi's popular predecessor and political rival, Anwar Ibrahim, was arrested and charged with abuse of power and sodomy. His arrest came in September 1998, just days after Anwar, who also served as Finance minister, had refused Mahathir's order to resign following a bitter clash over how to deal with Asia's financial crisis. Anwar adamantly denied the charges, and witnesses at his trial kept changing their stories. Nevertheless, he is serving an 18-year jail sentence. Amnesty International considers Anwar a "prisoner of conscience," and the U.S. has protested his incarceration.
Badawi's only comment at the time of the arrest was that he hoped justice would be done. Later he said that Anwar's conviction by a jury had to be respected. The uproar over the verdict and Anwar's beating in jail (to which Malaysia's chief of police pled guilty and for which he was convicted) put a dent in UMNO's traditional plurality at the polls in 1999.
BADAWI HAS SEEMINGLY PREPPED HIS ENTIRE LIFE to be P.M. Born into a prominent political family -- his father, Ahmed, headed UMNO in Penang and served as speaker in the state legislature -- Abdullah attended many political events, getting to know Malaysia's leaders. After completing an honors degree in Islamic Studies at the prestigious University of Malaya in 1964, Badawi entered the civil service as an assistant secretary of the Youth and Sports Ministry. Five years later he was named secretary of the National Security Council, created in the aftermath of race riots between native Malays and ethnic Chinese; it was later dissolved as tensions subsided. Badawi was promoted to director general of his old Sports ministry in 1971.
However, he was beginning to have second thoughts about a civil service career. Former deputy prime minister Musa says that Badawi came to see him after Badawi's father died in 1974. "He wondered whether he should enter politics," recalls Musa. "I encouraged him." A number of his father's contemporaries urged him to run for office. It took him a while to decide, but in 1978, Badawi ran for Parliament from his father's old district in Kepala Batas in Penang, a prosperous island state in northern Malaysia known today as Silicon Island for its semiconductor plants.
The gregarious Badawi proved a natural campaigner. He won in a landslide over his Parti Islam (known as PAS) opponent. Not long afterward he was appointed parliamentary secretary, a junior ministerial slot. It didn't take long for Badawi to ascend. In 1980 he was named a deputy minister of Social Welfare. A year later the newly elected Mahathir elevated Badawi to the cabinet where he operated as a kind of minister without portfolio overseeing the religious affairs department, among others. In 1984 Mahathir appointed Badawi minister of Education. That same year he was elected one of UMNO's three vice presidents -- only the prime minster and deputy prime minister had more clout.
Badawi's outgoing personality and his devotion to family and religion were major political assets. At times he espoused liberal sentiments -- democratic reforms and aid for the elderly -- but mostly the low-key Badawi cultivated allies. "He rose so fast because he had no enemies and no one saw him as a political threat," says his old friend Abid.
Badawi also gained a reputation for strict probity. Despite a quarter century in politics, Badawi has never been linked to any business interest or caught up in a scandal.
In 1987 Badawi's political career hit an air pocket -- caused by a bruising confrontation with Mahathir. Then Malaysia's Defense minister, Badawi joined with thenTrade and Industry minister Tengku Razaleigh Hamzah and his old mentor, former deputy prime minister Musa Hitam, to challenge the prime minister for UMNO's leadership. Malaysia was suffering through a recession, and the three believed that Mahathir wasn't doing enough for the country's underclass. Mahathir prevailed, narrowly winning a vote in UMNO's 1,200-member general assembly to retain leadership. He promptly fired Badawi from the cabinet.
Badawi found himself suddenly abandoned by colleagues who didn't want to be seen with a Mahathir enemy. "He'd go to the golf course, and people who were always eager to talk with him or shake his hand would just look away," recalls Abid.
Although Badawi says only that the experience made him realize who his true friends were, Abid says it was a very tough stretch: "His favorite word in those days was sabar, or patience. Some people advised him to give up politics, go into business and take it easy. He would just say, 'I have been elected by the people and have a job to serve them.' Those years in the political wilderness made him a much stronger person."
Attending to his job in Parliament, Badawi quietly laid the groundwork for his political rehabilitation. He traveled the country giving speeches and aiding local politicians, rebuilding his political base. In 1990 his comeback was complete: He again won an UMNO vice presidency. Mahathir invited him back into the cabinet as minister of Foreign Affairs. Over the next eight years, Badawi hewed to the UMNO line, becoming a key Mahathir spokesman and championing both free trade and unified emerging-markets positions on global issues. The job allowed him to travel extensively throughout Africa, Latin America and the Middle East before his promotion to deputy prime minister and minister for Home Affairs in 1999.
Through the ups and downs, Badawi maintained his even-keeled demeanor. Affectionately known as "Pak Lah" (Uncle Abdullah) to friends, Badawi spends virtually all his free time with his wife of 35 years, Endon, and their two children and four grandchildren. His hobbies are playing golf and restoring old cars. On a trip to the Middle East, Badawi nodded off just as his hosts brought out belly dancers. "I nudged his elbow and pointed to the dancers but he just dozed off again," laughs a colleague.
Badawi might like it if Mahathir dozed off during his own upcoming term as prime minister, but he can't count on it. Mahathir genuinely wants to give up his responsibilities and spend more time with his extended family, say his close friends. Others, though, speculate that he is likely to play a role akin to that of another legendary Asian strongman -- former Singapore prime minister Lee Kuan Yew -- who remains an influential figure in local politics (under the unassuming title of senior minister) despite having stepped down as prime minister more than a decade ago. Perhaps Mahathir, as exprime minister, will play a role as a roving ambassador or as head of a supranational emerging markets or Islamic group.
Some, however, foresee a more substantive place for Mahathir, despite his protests that he has no interest in a behind-the-scenes role. "There is a market perception that Dr. Mahathir will probably continue to exercise executive power, possibly reducing the effectiveness of the new leadership," says Daniel Lian, Singapore-based Southeast Asia economist for Morgan Stanley.
Mahathir's initially lukewarm embrace of his designated successor has helped to keep this perception alive. Asked why he chose Badawi, the typically blunt Mahathir told the Financial Times last year: "It wasn't my choice. He had been elected as the senior of the three vice presidents of UMNO . . . . I had to have a deputy and chose the most senior one." Still, in subsequent speeches and statements Mahathir has wholeheartedly endorsed Badawi. Indeed, a number of observers have concluded that Mahathir's special effort to drum up support for Badawi in recent months indicates that he really does intend to retire and relinquish a political role.
On the other hand, old habits seem to die hard. Mahathir has added to the speculation about his prospective role as shadow prime minister with two recent appointments. In September he publicly endorsed Defense Minister Najib Tun Abdul Razak to be Badawi's deputy prime minister -- a decision that Badawi would normally be expected to make of his own accord. Then in November, Mahathir named the former chairman of electric utility Tenaga Nasional, Jamaludin Jarjis, as Malaysia's second Finance minister. (Mahathir has been serving as his own Finance minister.) The appointment puts Jamaludin, an ally of Defense Minister Najib, in line to potentially become Finance minister in the new administration.
Badawi's bland assurances that he agrees with the naming of Jamaludin have left him in a bind -- and underscored the political pitfalls he faces. Having offered his blessing, Badawi may have to keep Jamaludin in a cabinet post after he becomes prime minister. Mahathir's endorsement of Najib, meanwhile, touched off speculation that Mahathir was positioning the Defense minister to challenge Badawi within the party in the event that the new prime minister stumbles early on. But then, in a dizzying turnabout, Mahathir backtracked, declaring that only Badawi had the support of the party and that the choice of deputies was his alone.
Coping with a powerful exprime minister who has retired but is far from out of the picture is just one of the political balancing acts Badawi must master. The even greater challenge -- one that taxed even Mahathir's resources and patience -- is to maintain a moderate Muslim nation (most Malaysians belong to the Sunni sect) in an era of rising Islamic fundamentalism. But like Mahathir, Badawi says he "will not hesitate to use the big stick against the extremists -- whether they are religious extremists or extremists of some other kind like those fanning racial extremism or some other ideology."
The opposition fundamentalist PAS, which has no history of violence, already controls governments in the northeastern states of Kelantan and Trengganu and has expanded its influence in three other conservative Malay states: Kedah, Pahang and Perlis. Most political analysts believe, however, that the party is unlikely to expand beyond its base in the less populous northern and northeastern belt. But PAS's gains -- at Mahathir's expense -- in the 1999 elections are worrying in a country so reliant on attracting and keeping Western manufacturers.
Will Badawi be less confrontational in tackling the shortcomings of Malaysia's democratic institutions? Most observers believe his consensus-driven leadership style can't help but improve civil liberties. Friends and associates say that Badawi will try to ensure greater autonomy for the courts. Says a onetime cabinet colleague of Badawi's, "This is good for Malaysia's political and economic development."
Of course, the very first priority of any democratic politician is to get himself elected. Badawi is expected to call for a vote some time next year. Mahathir leaves him with a pretty strong economic hand to play at the polls. Although far from its best showing, the Malaysian economy grew 4.2 percent last year, and consensus forecasts predict a further 3.8 percent expansion this year. Unemployment is at 3.5 percent and falling; inflation barely exceeds 1 percent; and wages have started to climb, albeit slowly.
Political analysts believe that Badawi's reputation as a deeply religious man could help him reverse fundamentalist party electoral gains. September 11 unnerved many of Malaysia's 9 million non-Muslims as well as its moderate Muslim majority; some of those who bolted from UMNO may back Badawi in the next election. The backlash over the Anwar affair was mostly directed at Mahathir, and Badawi's nice-guy image should help deflect lingering criticism. What most voters (not to mention foreign investors) will be watching for, however, is whether Badawi proves strong-willed enough to sustain the many economic positives of Mahathir's long tenure.
Politely, the prime ministerin-waiting puts it this way: "I can be very nicely firm."
Badawi: 'You must show that you care'
Abdullah Ahmad Badawi likes to drive "very, very fast" in the first car he ever owned -- a 1964 Mini Cooper that he recently restored. Racing along Penang back roads at high speeds doesn't fit the Malaysian deputy prime minister's image in politics. Renowned for patience, Badawi is expected to move at a deliberate pace after he takes over as prime minister in October from Dr. Mahathir Mohamad, who has ruled Malaysia, often with an iron hand, for 22 years.
Affable and soft-spoken, Badawi, 63, is a veteran politician and civil servant who has held virtually every senior government post during his career. By inclination and experience, he's a team player who listens carefully and seeks to move his moderate political and economic agenda forward through consensus. Badawi's initial challenge will be to solidify his leadership position before new elections, which he's expected to call next year. Only then can he start to emerge from the shadow of Mahathir, who modernized Malaysia's economy but has occasionally used tough tactics to get his way.
Badawi must push Malaysia's economy forward while coping with chronic political problems. Indigenous Malays like himself, who make up more than half the population, have been given substantial government assistance in recent years so that they have a chance to participate in Malaysia's economic boom in equal measure with the country's better-off Chinese minority, a powerful political force in their own right. This affirmative action program hasn't been particularly effective, while engendering discontent. (Badawi's United Malays National Organization, or UMNO, is the dominant partner in Malaysia's ruling coalition, the Barisan Nasional, or National Front.) Badawi, a Muslim, must also contend with the rise of Islamic extremists in Malaysia.
At his vast Putra Jaya residence, a traditional Malay villagestyle house overlooking Kuala Lumpur, Badawi discussed these and other topics with Institutional Investor Hong Kong Bureau Chief Kevin Hamlin and Contributor Assif Shameen.
Institutional Investor: What will change when you become prime minister in October?
Badawi: You must remember: Whatever decisions have been taken up to now are cabinet decisions, and there's collective responsibility. I'm a party to that. That's very, very important. Dr. Mahathir may have been the person who originated some of the ideas, but these policies are now national policies endorsed by the cabinet of which I am and have been a member for quite a long time. So when Dr. Mahathir goes, there will be no drastic change of regime; the same government will be in power. I have that collective responsibility to continue to carry out effectively decisions that have already been made by the party. It follows Dr. Mahathir's own suggestion that he wants to retire. This is the fourth time Malaysia will have a smooth transition of power. In many developing countries, transfers of power often come about through coups, revolution, insurgency or street demonstrations. We are fortunate that we have a tradition of peaceful handovers of power.
What will be the key political and economic priorities of your administration in the first six to 12 months?
My key priority in the short term will be to ensure that there is stability, security and continuity of policies. Obviously, economic issues, especially any fallout from the war in Iraq, would need attention. We need to have policy measures in place so that our own economy is not adversely affected if global growth starts to slow.
Malaysia has been led by a strongman for the past 22 years, and now you -- whom everyone calls "Mr. Nice Guy" -- are taking over. Will this huge difference in leadership style lead to problems for Malaysia?
Whether you want to be tough or accommodating or gentle, whatever style you choose, you have to be fair and just. To me being fair is very important and, at the same time, you must show that you care, whatever style you use.
Referring to affirmative action policies that favorBumiputras[or indigenous Malays], you said recently that "a nation which has its people on crutches cannot survive in a highly competitive world." Will you gradually remove those crutches?
I said that with conviction. If you are on crutches all the time, your knees will become so weak you cannot run. That, to me, is something that you cannot perpetuate. So we have developed a policy to enable the Bumiputras to be given some kind of a handicap, as in playing golf. But when a person has a [high] handicap and proves himself, surely he cannot have the same handicap as before. There are Malays today who are doing very well on their own. They do not need to be given any special assistance. There are others who need some help, and we should not refrain from helping them. The help we are giving them is to help them catch up, and later on we must slowly take it away from them. We cannot go on like this forever. If you continue with this kind of regimen -- giving them crutches all the time -- you will perpetuate mediocrity. If I continue to do that, it is an insult to my race; some people will say the Malay cannot do well unless someone comes out and helps them. When we introduced a degree of meritocracy in education some time ago, there were all sorts of reactions like, "This will kill the Malay"; "this is unfair"; "surely they are going to be in trouble." But we have to proceed with it. And all this time Dr. Mahathir and I and all the rest of us were just clasping our hands because if something were to go wrong, we would be hammered. But finally, we found that many Malay students competed very well.
What is your position on Islamic extremism?
I will not tolerate any form of extremism, whether it is based on religion, ideology or race. We have to deal with them very, very firmly. I believe the majority of Malaysians will agree with this. Certainly, Malaysians are totally opposed to terrorism of any kind.
Is the rise of China as an economic competitor a threat to Malaysia?
We don't see China as an economic threat. We look at China as a challenge and an opportunity. China is going to play a big role in shaping and defining the economic landscape of Asia. We are aware that we cannot compete with China on costs alone. So we are concentrating on attracting niche foreign direct investment in value-added industries rather than the labor-intensive manufacturing that China has been attracting. We believe we still have much to offer investors: stability, quality of life, good infrastructure, well developed sets of laws with commercial and intellectual property protection. We have an educated English-speaking workforce.
China is also a potentially huge market for goods and services. China is a big market for our commodities like palm oil. Our construction companies are building infrastructure in China. As China grows, we believe there will be more opportunities for goods and services and for our companies.
How important is corporate governance in your economic agenda?
Very important. I dare say that our corporate governance framework compares favorably with any jurisdiction in the world. For example, we introduced quarterly reporting for all listed companies well before other major markets like Hong Kong and Singapore. I am a strong advocate of transparency and good governance, and we will continue to work with agencies and regulators to strengthen these principles. I believe bad governance distorts efficient and fair allocation of resources, and that can blunt our competitive edge. I have said before that we must use a big stick to deal with those who are not in compliance with rules and regulations.
Mahathir's (and Badawi's) economic czar talks strategy
Nor Mohamed Yakcop will serve as a crucial bridge between the administrations of outgoing Malaysian Prime Minister Mahathir Mohamad and his designated successor, Abdullah Ahmad Badawi (story). Now senior economic adviser to Mahathir, the 56-year-old Nor Mohamed is expected to fill a similar role for Badawi when he takes office in October.
At one time the head of an aggressive currency trading operation at Malaysia's central bank, Bank Negara, Nor Mohamed was the architect of Malaysia's successful but controversial capital controls program following the 1997'98 Asian financial crisis. Although the strict controls on hedging Malaysian ringgit and repatriating currency or trading gains halted currency speculation, they angered foreign investors, who suffered losses in many cases.
An unofficial adviser to Mahathir for some time, Nor Mohamed became deputy governor of Bank Negara shortly after the imposition of capital controls and helped implement the postAsia crisis pegging of the ringgit to the U.S. dollar. More recently he has overseen government-led restructurings at Malaysia Airlines and conglomerate Renong Group, among others. Nor Mohamed recently spoke to Institutional Investor Hong Kong Bureau Chief Kevin Hamlin and Contributor Assif Shameen in his office in Putra Jaya, the spanking new administrative capital outside Kuala Lumpur.
Institutional Investor: Two years ago, Malaysia began improving corporate governance, tightening the rules, renationalizing troubled companies like Renong, Malaysia Airlines, telecom operator TRI, all of which had been given to politically connected players. Why?
Nor Mohamed: There was no real change in policy. Philosophically, the government has always wanted to improve corporate governance, have more transparency, and we wanted things to be done properly. But during the period of privatization in the '80s and '90s, a lot of entrepreneurs got hold of all sorts of assets from the government. Some of them managed the companies very well, others didn't. After the Asian crisis we found ourselves in a situation where a lot of good companies were facing cash flow problems. All this had begun to weigh on the economy and on the market and made the task of the government a little more difficult. So we realized we had to do something. That's not a change of policy or a change of heart. We just needed to clear up the bottlenecks.
[Postcrisis] we also realized that the large amount of borrowing by certain individuals to pay for these assets was creating problems. These individuals were given large [corporate] assets, and they had taken large liabilities to finance the purchase of those assets. Their problem was they couldn't service those liabilities with dividends alone.
How has the reform and restructuring process gone?
So far, so good. We started with a conglomerate called MRCB [Malaysian Resources Corp.]. It had over $1.2 billion of loans. Cash flow was a problem, and management was not focused at all. There were some strategic interests there as well; MRCB controls a large media group. [In late 2001] we put in two young guys, both in their early 30s, both Cambridge-educated, very bright, to run the company. We wanted people with a few [important] qualities: those who were honest to a fault, with unquestionable integrity, hard-working and intelligent. These two guys have already turned the company around in less than two years. It is cash-flow positive, profitable. Most of all, the management has got focus.
But remaking MRCB was just the appetizer. Our biggest headache was Renong and its affiliate, United Engineers Malaysia [another conglomerate, with interests confined mostly to construction, engineering and toll roads]. Renong Group had huge borrowings of about 10 billion ringgit [$2.5 billion]. The problem had been brewing for four years. Each time a scheme was proposed, it was shelved, delayed. All that was weighing on the market.
We looked back and saw that the Malaysian stock market had collapsed the day [in late 1997] UEM announced that it was buying a 30 percent stake in Renong. The market didn't like that move because to some it made a mockery of corporate governance. So we thought if we could undo that, perhaps we could restore confidence in the market. I went to the prime minister and told him that we really needed to do this. He asked me, "Are you sure you can do it?" There was some opposition, and people like [former Renong chairman] Halim Saad didn't like it, but we explained to him that we were doing what was good for the country rather than just one person.
What made Prime Minister Mahathir change his mind on Renong?
Once the prime minister saw what impact the Renong problem was having on the economy and market, he was convinced that things needed to change. He saw the downside if we didn't. We then went for a general offer of UEM shares that Renong didn't already own. Once we consolidated the two companies, we started looking at what was core for the group and what wasn't. We listed the [noncore] highway subsidiary, which is called Plus. It is very profitable and really like a triple-A-rated bond in Malaysia. It just collects tolls, and its main expense is maintenance of the highway, which is a small part of its revenues. We've sold Crest, a small oil services company, and Time DotCom, a telecom company. Some more assets will be sold.
What about the restructuring and bailout of Malaysia Airlines?
There was no bailout. Its assets were far more than its liabilities, so really, there is no way it can be called a bailout. Malaysia Airlines was run by [entrepreneur] Tajudin Ramli. It had accumulated a lot of debt, and it had other problems because it paid for aircraft in dollars, while a lot of the revenues were in ringgit. After the Asian crisis, demand fell, there was overcapacity in the industry, and there was the rising cost of fuel. When the government bought back the shares from Tajudin, he was paid the same amount of money he paid us, and the market didn't like that. But that was three years ago. The main problem with the airline was that it had borrowed short-term money for a long-term project. But there was a social interest involved. The airline serves far-flung domestic routes. So our thinking was that we take over the airline and eventually list the operational companies, while keeping the assets in a state company because they have a long gestation period. So the airline operating company is now listed. It earns revenue from carrying cargo and passengers, while assets like aircraft and property are leased from a government company.
Will Malaysia's economic strategy change after the succession? Do you need to tinker with capital controls and the dollar peg?
There will be no change in our philosophy or our economic strategy. Look at what we really did during the crisis. Yes, we did impose restricted capital controls, but for the past two years, we haven't had any form of capital controls. You can bring your money in, and you can buy stocks, bonds, property, whatever, and you can take it out anytime you want.
The only thing remaining is that the ringgit is still not convertible, and the currency is pegged to the U.S. dollar. We have said that we will maintain the peg at M$3.80 to a dollar. But we will be willing to change the peg if regional currencies move 20 percent from the 1998 exchange rates, because we don't want our currency to be way overvalued or way undervalued.
What sort of feedback have you been getting from foreign investors?
We have had very positive feedback. They are telling us they are happy that we have made moves, some of which were long overdue. We felt the impact on the stock market. After the RenongUEM restructuring, the market shot up, but then immediately thereafter, the September 11 incident had an impact on markets worldwide. Moreover, the global economy has been sluggish, so we haven't seen the portfolio flows that we'd normally see with such fundamentals. We believe it is only a matter of time until institutional investors return to Malaysia.