Malaysia's 'Darling' Status Isn't What It Seems

Never underestimate the power of delusion. Just ask Muhyiddin Yassin, the deputy prime minister of an Asian economy that last year almost beat Hong Kong as a destination for initial public offerings. The market in question: Malaysia.

The Southeast Asian nation topped Group of Seven-member Canada in 2012, ending the year as the world's fifth-largest IPO market. Not bad, considering Malaysia is Asia's ninth-biggest stock market, hardly a regional powerhouse. Malaysia was deemed a safe haven from Europe's debt crisis and a reasonable play on the China growth story.

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William Pesek is based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region. ... MOREQ

Yet Malaysian officials shouldn't get ahead of themselves in thinking their economy has suddenly become a "darling of investors," as Muhyiddin has said. There's a strong whiff of complacency in his recent comments about how the government is raising its economic game. If only it were.

Muhyiddin's boss, Prime Minister Najib Razak, has talked a great game of reform. But Malaysia has yet to tackle the reason so many investors and multinational companies underweight the place: affirmation-action policies that hold back its growth and dynamism in the world's most competitive region.

Malaysia is sandwiched between industrial heavyweights Japan, Singapore, South Korea and Taiwan, and a cast of fast-rising upstarts including China, India, Indonesia, the Philippines and Vietnam. Malaysia needs to act boldly and expeditiously to dismantle productivity-killing quotas that benefit only ethnic Malays.

"It's losing relevance and refuses to change its politically entrenched affirmative-action policies to gain back its economic prowess," said Chrisanne Chin, capital-markets consultant at IABT Research Malaysia. "The government is only interested in keeping power."

That creates a counterproductive brain-drain dynamic that encourages many non-Malays to seek opportunities overseas, especially in Singapore. "The brain drain is very real as the government continues its downward slide into mediocrity and decay," Chin said. "A darling of investors? I think not."

Muhyiddin and Najib must be careful about believing their own good press and get to work. Talking about leveling the playing field in Malaysia isn't the same as doing it. Until that happens, many executives and investors may take their business elsewhere.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)