Author: Donald R. Snodgrass.

Malaysia is an ethnically heterogeneous country which had the world's tenth-fastest growing economy in 1970-90. This makes it exceptional, since as a group ethnically heterogeneous countries were far poorer in 1990 than ethnically homogeneous countries and achieved a much lower growth rate of real per capita income in 1965-90. Ethnically heterogeneous countries were underrepresented among the fastest-growing countries and overrepresented among the countries that were unable to raise per capita income between 1965 and 1990. Malaysia is also unusual in having attempted to reduce ethnic economic inequality by undertaking an ambitious affirmative action program -- the New Economic Policy, or NEP -- in 1971. Targets were set for poverty alleviation and the ethnic restructuring of employment and business ownership and control, to be achieved by 1990. As intended (but to the surprise of many), redistribution and restructuring took place in the 1970s and 1980s within the context of economic growth. Malaysia combined a high growth rate in 1970-90 with achievement of most of its affirmative action goals. Two major analytical questions arise. One is counterfactual: what would have happened in Malaysia in 1970-90 if the NEP had not been undertaken? Although most economists would predict a higher rate of growth in the absence of measures to change the distribution of income and wealth, the analysis suggests that the NEP may actually have boosted the growth rate when sociopolitical factors are taken into account. The second question is factual: What made it possible for Malaysia able to grow while redistributing? Three possibilities are considered: good policy, good luck, and pragmatism. Although all three played a part, greatest credit is awarded to pragmatism, illustrated by key policy changes introduced in 1986. Malaysia's future is considered, especially its chances of reaching the official goal of becoming a "fully developed country" by 2020. In terms of growth rates, this seems plausible, but continued good management of ethnic politics will be needed. Elevating the economic capacity of the indigenous people may in the long run make it possible to convert ethnic heterogenity from an impediment to economic growth into an advantage.