MALAYSIA: MAHATHIR UNDER PRESSURE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00928R000200100004-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: February 7, 2012
• Sequence Number: 4
• Publication Date: January 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Malaysia:
Mahathir Under Pressure
EA 84-10003
January 1984
Copy 299
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Intelligence
Malaysia:
Mahathir Under Pressure
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This paper was prepared b~ 25X1
Office of East Asian Analysis. 25X1
Secret
EA 84-10003
January 1984
Comments and queries are welcome and may be
directed to the Chief, Southeast Asia Division, OEA,
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Secret
Malaysia:
Mahathir Under Pressure
Key Judgments Prime Minister Mahathir arrives in Washington in his most vulnerable
Information available political position since taking office in 1981. Over the past year he has
as of 3 January 1984 faced:
was used in this report.
? A slowdown in the growth of government spending that threatens his goal
of giving ethnic Malays economic parity with the ethnic Chinese.
? A banking scandal that may implicate officials at the highest levels of
government.
? A bitter dispute with Malaysia's royalty over the legislative powers of the
king.
These problems, combined with a prickly personality and a tendency to
promote younger party members to important positions, have earned him
enemies among his party's conservative old guard, which is likely to
challenge him in party elections this spring. The ongoing banking scandal
and economic problems could cost him public support as well.
As a result, we expect Mahathir to have less freedom of movement over the
next year, and he probably will be forced to give way to his opponents in
some areas. In order to placate ethnic Malays, unhappy with Mahathir's
economic policies and his dispute with the royalty, he might adopt an even
more strident economic nationalist stance or emphasize Islamic policies.
He may also bring more conservative party members into the government
in an attempt to placate the old guard. If adopted, these measures would
also reverse the warming trend in relations with the United States,
returning the two countries to the strident confrontation over economic
issues that characterized the early years of Mahathir's term.
Secret
EA 84-10003
January 1984
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secret
Malaysia:
Mahathir Under Pressure
another 5 held by National Front allies.
An Aggressive Beginning
Mahathir bin Mohamad succeeded to the prime-
ministership in July 1981 following the resignation of
his predecessor, Hussein Onn. Anxious to win a five-
year mandate on his own, Mahathir called for nation-
al elections the following April and conducted an
aggressive and intense campaign. Despite an earlier
reputation as a Malay chauvinist, Mahathir's dynam-
ic style of leadership, coupled with an emphasis on
honest and efficient government responsive to all
ethnic groups, struck a responsive chord among the
public, and his 11-party multiracial coalition (the
National Front) swept to an overwhelming victory.
The coalition captured 61 percent of the popular vote
and 132 of Parliament's 154 lower house seats, with
dominated tin industry.
After the election, Mahathir moved to consolidate his
political position and reinforce his image as an advo-
cate of Malay interests. He attempted to disarm the
Malay right by bringing Anwar Ibrahim, the popular
Malay fundamentalist youth leader, into the Cabinet
and introducing "Islamic" subjects in high school and
university curriculums. He also sought support among
poorer Malays by accelerating housing subsidies and
social spending-even in the face of economic diffi-
culties. But he did not neglect non-Malays, and he has
earned the gratitude of elements of the Chinese
community by his measures to help the Chinese-
Not unexpectedly, his success has earned him enemies
within his party, the United Malays National Organi-
zation (UMNO). Mahathir's major opponent is Minis-
ter of Finance Tunku Razaleigh Hamzah, who in
1981 unsuccessfully opposed Mahathir for UMNO's
number-two position. Razaleigh, according to party
members, believes Mahathir did not give him due
recognition for the major role he played in organizing
the National Front election victory. Razaleigh has
now made common cause with the party's conserva-
tive wing-the old guard-which does not like Ma-
hathir's abrupt style or his practice of promoting
younger politicians to important government and par-
ty positions. The old guard also claims Mahathir has
not sought the traditional Malay consensus before
introducing important issues. In addition, some Malay
chauvinists believe that the Prime Minister has re-
treated from his earlier days of advocating Malay
rights and that he has not done enough to emphasize
Malaysia's Islamic identity.
The New Economic Policy and the Economy
At the same time Mahathir is facing opposition within
his own party, a slowdown in the growth of govern-
ment spending threatens his programs for Malay-
sian-and Malay-economic development. These
programs are based on the New Economic Policy
(NEP), which was created in 1970 to reduce foreign 25X1
and ethnic Chinese control of the economy through
government support for ethnic Malays. Because the
redistribution is intended to be achieved without
reducing the absolute level of Chinese economic hold-
ings, its success is dependent on continuing economic
growth.
Through the 1970s, a buoyant economy, growing at
an 8-percent annual rate, supported this redistribu-
tion. Government expenditures-financed by taxes on
international trade and oil-rose nearly 20 percent in
this period and funded increases in social spending
along with the purchase by the Malay National Trust
of equity in both Chinese and foreign businesses. As a
result, the Malay share of the country's corporate
wealth increased from 4.3 percent in 1971 to 12.4
percent a decade later.
Since becoming Prime Minister, however, Mahathir
has seen the global recession slow Malaysia's econom-
ic growth to 6 percent in 1981 and 4.6 percent in
1982. Depressed international commodity prices-
especially for oil, tin, and rubber-reduced both
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export earnings and the government's trade-based
revenues substantially. The 1982 current account
deficit (which measures the balance of trade in goods
and services) ballooned to $3.4 billion-nearly 16
percent of GNP-a phenomenal swing from the sur-
plus of $1 billion in 1979.
Mahathir's first reaction to these financial strains was
to boost foreign borrowing in an attempt to offset
depressed export earnings and maintain economic
development, social, and defense expenditures. As a
result, Malaysia-which entered the 1980s with one
of the smallest foreign debts in Asia-was trans-
formed into one of the most aggressive foreign bor-
rowers among developing countries, taking in an
additional $2.5 billion in 1982 alone, which raised the
outstanding public foreign debt by one-third. The
growth of the foreign debt continued at a similar pace
in 1983.
Expansionary government spending along with reces-
sion-reduced tax revenues boosted the domestic bud-
get deficit to $4.2 billion in fiscal 1982-17 percent of
GNP. In October 1982 Mahathir instituted a pro-
gram of fiscal austerity aimed at holding down for-
eign borrowing and preserving Malaysia's high inter-
national credit rating. Although the economy,
propelled by an export boom, improved markedly in
1983-with output growing at 5.6 percent, govern-
ment revenues have not recovered much and budget
austerity continues. The 1984 budget projects deep
cuts in development spending (26 percent) and defense
(20 percent); after adjusting for the anticipated 5- to
6-percent inflation in 1984, the cuts will bite even
deeper.
Although the economy is likely to grow at more than
6 percent annually in the next few years, Malaysian
officials do not expect government expenditures to
return to the heady growth of the past decade.
Government revenues are likely to expand more slow-
ly than the economy as a whole unless there is another
boom in commodity prices. And growth in govern-
ment expenditures will also be restrained by concern
over rapidly increasing payments on the foreign debt,
according to the financial press. As a result, Malay-
sia-which has one of the highest ratios of govern-
ment spending to GDP in non-Communist Asia (40
percent)-plans to reduce the relative role of govern-
ment in the economy over the next few years. In
addition to cutting development spending, Mahathir is
also pushing "privatization" of the economy, which
would have the government divest itself of activities
such as power, transport, and communications in
order to raise funds for other government projects
If maintained, the reductions in development spend-
ing-the cornerstone of NEP-would be especially
ominous to Mahathir's plans. Although public-sector
construction is likely to remain constant in 1984
because of projects already in the pipeline, the cuts
will affect both infrastructure and industrialization
projects in the next few years. The government is thus
likely to fall far short of its spending targets under the
current five-year plan, which ends in March 1986,
and of its goal of 30 percent Malay control of the
economy by 1990. Mahathir, once considered a Ma-
lay chauvinist, ironically could become the scapegoat
for NEP's failure to reach its goal.
The Bank Bumiputra Scandal
Mahathir's handling of the NEP is also under attack
as a result of a major banking scandal involving Bank
Bumiputra, the financial arm of the NEP. Bank
Bumi, one of the largest commercial banks in
ASEAN, is a quasi-governmental agency responsible
directly to the Prime Minister
The scandal broke in early 1983 with the revelation
that Bank Bumi's wholly owned subsidiary in Hong
Kong, Bumiputra Malaysia Finance (BMF), had
made large unsecured loans to three Hong Kong
Chinese property speculators. Much of the money-
estimated by the financial press at more than $700
million-has been lost because of the collapse of the
Hong Kong property market. The atmosphere of
scandal was heightened by the still unsolved murder
of the BMF's chief auditor in Hong Kong last July,
and the trial of Hong Kong property developer George
Tan early this year is likely to result in further
damaging revelations.
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The government's investigation, moreover, has been
slow, leading to criticism of Mahathir by opposition
figures and UMNO politicians alike. The opposition
Democratic Action Party in October renewed its call
for a Royal Commission to expedite the investigation
and make the'results public.
Both the Prime Minister and his opponent Razaleigh,
however, have much to lose. Razaleigh, who was the
Bank's chairman from 1970 to 1976 and the architect
of its rapid growth, is closely identified with the Bank
by most Malaysians. A close associate, Tan Sri
Kamarul Ariffin, was chairman when most of the
Hong Kong loans were made. The top executives of
BMF, who were forced to resign in late October, are
also closely tied to Razaleigh.
The bank's present chairman, Nawawi Mat Awin, is
one of the Prime Minister's closest economic and
financial advisers, according to the US Embassy.
Critics point out that the BMF continued its loans
into Nawawi's term-even though other international
banks were avoiding such loans. Nawawi, who the
Embassy says was once considered a strong candidate
to replace Razaleigh, has already been hurt by his
stonewalling of the investigation. For Mahathir, pub-
lic findings showing that his protege Nawawi contin-
ued to approve loans even after the problems began to
surface would call into question Mahathir's judgment
in making personnel choices and would strengthen the
old guard's claim that the Prime Minister's emphasis
on new blood in party and government positions is ill
advised.
Mahathir's Pyrrhic Victory
Mahathir's campaign to reduce the king's constitu-
tional powers has given the old guard more ammuni-
tion. Malaysia's Yang Dipertuan Agong (king) has
several powers granted by the constitution. He can:
? Prevent parliamentary legislation from becoming
law by withholding royal assent.
? Declare an emergency without consulting the Prime
Minister.
? Refuse to dissolve Parliament even if the Prime
Minister recommends it.
? Appoint a prime minister of his own choosing.
Malaysia's Royalty
Malaysia has constitutional monarchs at both the
national and state level. Nine of the country's 13
states have hereditary rulers, usually called sultans,
whose families ruled their small states at the time of
the British colonial takeover. Some, like the Raja of
Perak, trace their line as far back as the 16th
century. The British retained the local rulers during
the colonial period, using them as a front for exercis-
ing power.
The position of Yang Dipertuan Agong (king) was
created in 1957 at independence. The kingship rotates
among the nine state rulers, who convene every five
years in a Council of Rulers to elect a new king from
among themselves. The present king, Tuanku Ahmad
Shah of Pahang, is Malaysia's seventh, having
reigned since 1979. His successor will be chosen in
April and probably will come either from the royal
houses of Johore or Perak, whose families have yet to
give the country a king. Once a king has served his
term, he returns to his position as state ruler.
The king can be impeached by Parliament but can
only be removed by a majority vote of the Council of
Rulers. In return for his national position the king
may not receive any revenue from his home state, nor
can he engage in any commercial enterprise. Court
expenses are paid by the government from a fund
called the Civil List.
Although no king has yet invoked them, Mahathir
fears that the king to be elected next April might use
these Dowers to underc the Prime Minister.
the government is concerned
that the Sultans of Johore and Perak, likely candi-
dates to succeed the present King, intend to use the
royal powers to promote legislation favoring ethnic
Malay interests in a way unnecessarily antagonistic to
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Malaysia's Chinese and Indian communities.
deal with the ethnic Chinese-will cost him support
among rural Malays and give ammunition to those
who argue that the NEP benefits only the wealthy
Malays. This is compounded by the government's
austerity budget, which commits less funding to devel-
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In August Mahathir passed through Parliament a
constitutional amendment ending the need for royal
assent on legislation and requiring the king to obtain
the consent of the cabinet before declaring an emer-
gency. The influence of state rulers would also be
reduced. Malaysia's royalty saw the amendment as a
direct challenge to its political and cultural role, and
when the Council of Rulers-whose membership in-
cludes all nine of Malaysia's state monarchs-met on
12-15 October, they advised the King not to sign the
amendment. According to the US Embassy, Mahathir
was shaken by the vehemence of the Council's reac-
tion.
The Prime Minister's struggle with the rulers gave his
opponents within UMNO a chance to attack Ma-
hathir. The old guard presented itself as the defender
of Malay interests, took the side of the sultans, and
urged Mahathir to withdraw the amendment. The
party's executive body, the Supreme Council, initially
gave him only lukewarm support. Although the Prime
Minister received the backing of UMNO's national-
level youth and women's organizations, he did not do
as well at the state level, where the old guard is more
entrenched.
Finally, in December, Mahathir was forced to com-
promise. In return for a modified amendment that
allowed for a two-thirds vote of Parliament to override
a royal veto on a bill, Mahathir dropped the other
provisions. In addition, the sultans gave "verbal assur-
ances"-without specific guarantees-that they
would not withhold their assent to state legislation.
Mahathir's Position Weakened
Mahathir's reputation as a promoter of Malay inter-
ests-and thus his position as party leader-clearly
has been weakened. His struggle with the sultans has
been successfully portrayed by his opponents as an
unwarranted attack on Malay customs and tradition.
The Bank Bumi scandal-in which an institution
popularly identified with economic progress for ethnic
Malays lost money in a dubious international business
opment projects supporting the NEP.
In addition, the Bank Bumi scandal and the rapid
growth of the foreign debt, according to the financial
press, are tarnishing Malaysia's image among inter-
national bankers for competent economic manage-
ment. And both bankers and foreign businessmen are
beginning to take a second look at the assumption of
an ever expanding Malaysian economy-a develop-
ment that could threaten the foreign loans and invest-
ment crucial to the economic growth needed to sustain
the NEP. Failure to meet the goals of the NEP would
erode Mahathir's support within UMNO.
Any further loss of public support or international
confidence will encourage Mahathir's opponents with-
in UMNO to challenge him at the party assembly in
May. The Prime Minister has never totally controlled
UMNO; even in his home state of Kedah, the Chief
Minister attacked Mahathir for inaction over the
Bank Bumi affair. But a direct attempt against
Mahathir at the assembly would be unprecedented.
Instead, we expect Razaleigh and the old guard to
attempt to dislodge Musa Hitam-Mahathir's close
ally and probable successor-from his position as
deputy leader of UMNO (and thus from the deputy
prime-ministership as well). But we do not rule out
Razaleigh's directly challenging Mahathir for the
party leadership if the latter's position is viewed as
being weak enough to preclude a divisive struggle at
the party meeting.
Heading Off the Opposition
We expect Mahathir to weather the storm, but he
probably will be forced to give way to the opposition
in some areas. Among his more likely choices are:
? Compromise with the UMNO old guard, possibly
offering Razaleigh the deputy spot and placing
more old guard members in party and government
positions in exchange for unified backing on the
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Issues Affecting US-Malaysia Relations
National Front.
US-Malaysian relations until recently were charac-
terized by strident confrontation over international
economic issues. The most acrimonious bilateral
issue is commodities. Malaysia is the world's largest
producer of both tin and natural rubber, which
together brought in $3.5 billion in 1980-a fourth of
Malaysia's export earnings. Earnings from tin and
rubber have fallen by more than a third since 1980
because of depressed international commodity mar-
kets. The importance of tin and rubber in the Malay-
sian economy transcends their role as export earners,
however. Over 2 million people out of a population of
15 million depend on rubber as the primary source of
income. Tin mining is largely controlled by wealthy
Chinese who provide financial support for Mahathir's
Western countries.
Mahathir claimed that US sales of tin from the GSA
strategic stockpile beginning in 1981 depressed tin
prices at a time when they were already low because
of the global recession. Mahathir also claimed that
the US refusal to participate in the Sixth Internation-
al Tin Agreement-composed of both consumer and
producer countries-weakened that organization's
ability to prop up prices. Kuala Lumpur in 1982
attempted tofght what it viewed as US economic
warfare by financing a large tin-buying operation on
the London Metals Exchange and by promoting the
formation of a tin producers' cartel-measures that
were unsuccessful in raising the international price
because of the global surplus of that metal. Last year
Mahathir also promoted an unsuccessful attempt by
the rubber producers' association to restrict the sup-
ply of natural rubber to drive up prices; international
demand for rubber remained depressed because of the
global recession. These efforts were accompanied by
strident rhetoric attacking the commodity policies of
Moreover, Mahathir-who views himself as an eco-
nomic spokesman for developing countries-has ac-
cused the West, and the United States in particular,
of maintaining a global economic system that dis-
criminates against developing countries by keeping
the international prices of commodities (tin and rub-
ber) depressed and the prices of imported manufac-
tured goods high. He has also publicly blamed the
United States for following economic policies (high
interest rates) that created the global recession.
For nearly two years, the hostile atmosphere generat-
ed by these economic confrontations threatened to
sour bilateral relations in other areas. The signing of
a US-ASEAN memorandum of understanding on
GSA tin sales last fall-in which the US agreed to
limit sales to 3,000 tons a year through 1984-
combined with an improving Malaysian economy
have eased these strains. We expect, however, Ma-
hathir to continue his push in the international arena
for international commodity agreements and a new 25X1
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Bilateral relations in other areas have been more
amicable. In foreign policy, while Malaysia professes
a nonaligned stance and does not want to appear to be
a client state of the West, it is moving closer to the
US position on many East-West issues. This, accord-
ing to the Embassy, is because of an increased
perception of the Soviet threat to Southeast Asia.
Mahathir appreciates US support of ASEAN's efforts
to resolve the Kampuchean conflict and, according to
the Embassy, is increasingly reassured about the US
security commitment to the region.
Kuala Lumpur is also shifting toward closer defense
cooperation with the.United States. Joint military
exercises, although not publicized in the Malaysian
press, have increased from zero in 1981 to 13 in 1983.
Malaysia looks increasingly to the United States for
the training of military personnel, and the US Em-
bassy expects expanded access for US P-3 surveil- 25X1
lance planes to Butterworth Air Force Base. 25X1
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revised constitutional amendment and the bank
scandal. This would neutralize Mahathir's short-
term problems at the price of his image as a new
man above the traditional, often corrupt Malay
style of politics. It would reduce his acceptance
among non-Malays.
? A push for greater Islamicization (Malay domi-
nance) of Malaysian society to renew his Malay
credentials. This could be done by requiring Malay
as the language of instruction at all educational
levels (elementary schools can at present use Tamil
or Chinese as well as Malay), or by bringing all
Malaysians under Koranic law. While such moves
would mollify Malay conservatives and buttress
Mahathir's reputation as a promoter of Malay
interests, it might also upset the country's delicate
racial balance.
? Adoption of an even more strident economic nation-
alist stance on international economic issues-per-
haps a more determined advocacy of a "new Bretton
Woods" agreement to restructure the world finan-
cial system in a way favorable to Third World
countries-or on international commodities issues
such as rubber and tin. This would reap domestic
support but might frighten the international invest-
ment Malaysia wants to continue its economic
progress.
Mahathir can also call for a national election asking
the voters to view it as a referendum on his handling
of the bank scandal, the struggle with the sultans, and
the austerity budget. While an election call fits into
Mahathir's confrontational leadership style, we be-
lieve it would only be a policy of last resort. Mahathir
and the UMNO-led National Front would most cer-
tainly win, but any net loss of seats would be viewed
as an erosion of popular confidence in his leadership
and would further stimulate an old guard challenge.
Effects on US-Malaysia Relations
Mahathir's attempts to cope with his domestic prob-
lems could set back the recent improvement in rela-
tions with the United States. Mahathir has already
expressed dissatisfaction with what he sees as a
preponderance of Western influence over the world
economy, and has pushed a "Look East" program to
pattern Malaysia's economic development along Japa-
nese and Korean models. Nonetheless, he has usually
been more accommodating in actual negotiations. If
he feels himself losing popular support, however, the
translation of his economic nationalist leanings into
official policy implementation would be tantalizing.
There is some danger that this might stimulate the
Muslim fundamentalist, essentially anti-Western,
strain among the ethnic Malay, making the resolution
of difficult bilateral disputes virtually impossible.
Moreover, a push to accelerate Malay control of the
economy could put private US investment of about
$2.5 billion at risk.
Bilateral relations could go either way if Mahathir
were forced to resign. If he were replaced by Musa
Hitam, we would expect the bilateral relationship to
strengthen. According to the US Embassy, Musa,
who studied at a US university, might be more
understanding of US positions on bilateral economic
issues. Mahathir's replacement by the more prickly
Razaleigh and his old guard supporters, however,
could lead to a more confrontational Malaysian ap-
proach on economic issues and a move away from the
growing warmth in defense cooperation.
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