My Say: The 30% equity conundrum of the New Economic Policy

This article first appeared in Forum, The Edge Malaysia Weekly, on August 9, 2021 - August 15, 2021.
My Say: The 30% equity conundrum of the New Economic Policy
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The New Economic Policy (NEP) was tabled in parliament in July 1971. On the occasion of its 50th anniversary, there have been several reviews and statements calling for a re-appreciation of its contributions, evaluation of its omissions and missteps in popular discourses, and consideration of where Malaysia can go from here.

Two of these calls have been carried by news portal Malaysiakini; they take opposing stances. Neither of these cites quantitative information.

Lee Hwok Aun has presented an evaluation that highlights the extent to which the broad goals of the policy have been met and need to move on. He makes the point that we should stop the fixation on a single, monolithic expiry date to the NEP, and with 30% equity ownership as the basis for determining whether policies continue or terminate.

The other evaluation by Abdul Halim Husin, president of the Malay Chamber of Commerce Malaysia, more narrowly focuses on the existence of income and wealth inequalities. He sidesteps discussion of the progress made in uplifting disadvantaged bumiputeras. He is fixated on the issue concerning the target of attaining 30% of corporate equity.

Both commentators err by suggesting that the 30% target has yet to be attained. This is a debatable contention. Both commentators fail to make any reference to research studies that report findings that contradict the official estimates.

It is appropriate to begin with a focus on the nature of this target and the manner in which it is calculated. To set the record straight, it is important that we go back to the origins of this target and the manner in which the baseline estimates were calculated.

The baseline numbers of corporate equity used in the formulation of the NEP were calculated by classifying share ownership in both publicly listed and privately owned limited companies. Ethnicity was used as a determining factor; no entities were excluded.

The use of the totality of corporations was in line with the recommended approach advocated in the United Nations’ System of National Accounts (SNA). The ownership structure of each corporate entity was compiled by taking account of the ethnicity of shareholders. This identification was determined by using the name of each shareholder to assign ethnicity. In brief, the resulting count was that of the number of shares as no ringgit share values were determined.

One reason for this was the non-standard nature of the accounting returns that had been filed by the registered corporations. This was the best that could be done given the nature of the available data and the time constraints under which we were then operating. The latter precluded the feasibility of carrying out a survey.

The 30% target was set along with assertions that this would be achieved through a process of economic growth and not redistribution or nationalisation or expropriation. It was further understood that the baseline numbers would be further refined at a later date via a primary collection of data. Indeed, the Department of Statistics did launch the Ownership Survey of Companies with that objective in mind; the survey incorporated a section containing a standardised balance sheet.

The comprehensive data collected provided a basis for using balance sheet values to determine equity, which in turn could be sub-divided by ethnicity. The tragedy was that the Economic Planning Unit chose not to tread that path and stuck to the older base numbers. The data from the Ownership Survey of Companies was classified as “sensitive” and not released.

All companies were included in both set of calculations consistent with the notion that when the government claims legal ownership of an entity on behalf of the community at large, the benefits also accrue to the government on behalf of the community at large. Thus, the government is both the legal and economic owner of these entities. This theoretical concept predated the current day treatment embodied in the SNA.

The methodology employed by the government produces a result indicating a shortfall in what has been achieved. Critics have been critical of the government on a number of counts. The absence of actions to correct the basis for calculating the value of equity holdings has reduced the credibility of the statistics released.

Changes in the classifications of ethnic groups used in the data released have contributed to data comparability over time. Despite the importance attached to this important policy target, data has been released at infrequent intervals. On the other hand, professionally researched empirical studies yield an outcome showing that bumiputera holdings of corporate equity appropriately valued exceed 30%.

It is this aspect of the NEP that needs correction via an adoption of valuations based on a more defensible set of principles. Asset values need to be calculated based on concepts that take account of commercial accounting concepts that happen to be aligned to the SNA.

The re-evaluation can be easily accomplished at a minimum cost as the needed data exists in the files of the Companies Commission of Malaysia. Furthermore, the data is available on an annual basis and can thus be used to track progress or lack thereof at regular intervals. A transparent and timely availability of ownership data would remove a key contributor to ethnic tensions.

It is significant that even though the 30% target has been placed on a pedestal, the government has been neither transparent about fully disclosing the underlying methodology nor has it been regular in reporting the current ownership patterns. This has contributed to unnecessary tensions.

For five decades, we have pursued policies that were central to the effort to make structural adjustments. It is imperative that we draw lessons from the past and make appropriate corrections. We need to look at history holistically and in charting our future course.

A first step in charting a new course demands an acknowledgement that the numbers currently touted by the government are deeply flawed and need to be corrected via adoption of internationally recognised concepts and definitions. This should be accompanied by regular (annual) updates.

Credible data is a fundamental requirement to support evidence-based policies. Greater transparency in the collection and dissemination of data on equity holdings will contribute to an improved investment climate vitally needed in the aftermath of the Covid-19 pandemic.

Failure to introduce the reforms listed above will continue to impact on race relations and policy distortions. These distortions are likely to potentially lower growth and would run counter to the twin goals of achieving a restructuring of the economy and promoting sustainable growth.


Datuk Ramesh Chander is a former chief statistician of Malaysia and a senior statistical adviser at the World Bank in Washington DC

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