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The Malaysian Political Economy: Nationalism, Race and Party Politics

Info: 10950 words (44 pages) Dissertation
Published: 15th Nov 2021

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Tagged: EconomicsPoliticsSocial Studies

Assessing the impact of how political events create macroeconomic fluctuations in Malaysia.

ABSTRACT

This dissertation looks upon the notion of a separation within society, Malaysia is intensely a society separated by party politics, race and religion as the task of integration is subsequently dependent in the factor accepting of ethnic allegiance to the state or to one another?  The combination of socio-political challenges and with the complexities of racial salience, confound the atmosphere to formulate political events. The complexities are filled with differential aspects of nationhood, the political parties entail within the Malaysian political economy and the aspirations of what a developed Malaysia would look like. It combines the notion of political and the economical spectrum intertwining with each other forming and dictating the each other’s movement. This dissertation is the symbol behind the relationship where by assessing the political events which create macroeconomic fluctuation could give an understanding in Malaysian politics that are engulf with different themes. The theme of the perceived view of how Malaysia should be, the identity with ethnic communities that makes up the demographic population that furthers the cause for unification. That while the differences over another are conclusive that the economics affect us all due to political actors. It is the ability to overcome the differences of political aspects, that a nation such as Malaysia could progress.

Click to expand Table of Contents

TABLE OF CONTENTS

List of Abbreviations……………………………………………………………….    5

PART I                                                                                                             6-23

Introduction………………………………………………………………………..   6-11

Chapter 1…………………………………………………………………………..  12-14

Chapter 2…………………………………………………………………………..  14-17

Chapter 3…………………………………………………………………………..  18-21

PART II                                                                                                            24-29

Hypotheses…………………………………………………………………………  24

Literature review…………………………………………………………………  25-26

Methodology……………… ……………………………………………………….28-31

PART III                                                                                                          31- 37

Analysis and Results…………………………………………………………..       31-32

Conclusion……………………………………………………………………..        32

Bibliography……………………………………………………………………        34

Appendixes……………………………………………………………………..        37

LIST OF TABLES AND FIGURES

Figure A            Political event to Stock Market                                                  20

Figure B             Political events to the index of industrial production                20

Figure 1              OLS Regression Model                                                             29

Figure 2              OLS Regression Model                                                             29

Figure 3              Impulse response analysis Model                                             30

Figure 4              Variance Decomposition Model                                               30

Figure 5              Inverse AR Root Model                                                            30

LIST OF ABBREVIATIONS

BN                                 Barisan Nasional (National Front)

BA                                 Barisan Alternatif (Alternative Front)

BSM                              Bursa Saham Malaysia (National Stock Exchange)

BNM                              Bank Negara Malaysia (Central Bank of Malaysia)

DAP                               Democratic Action Party

GE                                  General Elections

GGK                               Gerakan Keadilan Rakyat (People’s Movement for Justice)

GPM                               Gagasan Demokrasi Rakyat (People’s Democracy Movement)

GBP                               Great British Pound

IMF                                International Monetary Fund

ISA                                 Internal Security Act

KLSE                              Kuala Lumpur Stock Exchange

MCA                               Malayan/Malaysian Chinese Association

MIC                                 Malayan/Malaysian Indian Congress

NEP                                New Economic Policy

NGO                               Non-Governmental Organization

PR                                   Pakatan Rakyat (People’s Pact)

PAS                                Parti Islam Se-Malaysia (Pan Malaysian Islamic Party)

PKR                                Parti Keadilan Nasional (National Justice Party)

RM                                  Ringgit Malaysia (National Currency)

TN50                               Transformasi Nasional 2050 (National Transformation 2050)

UMNO                            United Malays National Party

INTRODUCTION

The notion of how a country develops itself is perplexing. There are several factors that contribute to the progress of a country; the education system, the standard cost of living and the style of governance (Austin, 2012). However, there is one distinctive factor that each country share, which is the relationship of how politics affect the economy (Reno,1999). Malaysia is no different. Malaysia is profoundly a society divided by party politics, race and religion as the task of unification is subsequently dependent in the factor reconciliation of ethnic allegiance to the state. The combination of socio-political challenges and with the complexities of racial salience, confound the environment to concoct political events. The demographic make-up of the population comprises of different ethnicities with three groups that are major; the Malays encompasses almost 50 %, the Chinese with 23% and the Indians with 6.7% in Appendix B. The “Orang Asli” or the indigenous populous accounts for 11.8% of the population. The term Bumiputera literally mean the son of the soils describing a collective of ethnic groups such as the Malays, with other indigenous people under the constitution. Within the context of the political economy, the Bumiputera share a special status in Malaysian society in accordance to policies such as the New Economic Policy (NEP).

OBJECTIVE OF THE STUDY

A government needs political stability to manage a country. The beginning of the year 2017, Prime Minister Najib Razak announced “Transformasi Nasional 2050” (TN50) a governmental initiative designed as a foundation for future developmental aspects for the country and the aspirations of the citizens of what the state would be in the year 2050. The projected 33-year plan resembles that of “Wawasan 2020” in 1991, launched by the then Prime Minister, Dr Mahathir Mohammad envisions the government plan for the country to be developed and an industrialised state from a third world country. Undeniably, Barisan Nasional (BN), the political party that has been in power since independence in 1957; that with policies such as TN50, underlies the confidence of its political trajectory to continue ruling. However, achieving certain pedigrees of its ambitiousness faces obstacles in the form of political events. Political events are the association of actions by individuals within the socio-political public domain that is derivative of political nature affecting the civil realm.

The spurs of uproar are exhibited negatively or positively impacts the characteristics which are consequential to a country; the rate of development, destabilisation of civil society, the confidence of the populous towards its government and the unification strength of races in a multiracial civilization. The specific purpose of this research is to search out effect of political events on the Bursa Saham Malaysia (the Malaysian stock market), the index of industrial production and the exchange rate from Ringgit Malaysia (RM) to Great British Pound (GBP) from the period of 1998-2016, and an 18-year period. This research is considering stock market to get an understanding that how it performs in case of political instability in Malaysia. This paper proposes to illustrate the significant relation of how the impact of political events creates macroeconomic fluctuations in Malaysia. It is essential that before further taking steps into progress, revaluation of the methods, environment and aspects that enables the formulating of successive process for the country.

STRUCTURE

The structure of the dissertation is divided into three parts that shall give a greater insight to the question, a setting on the economic and political aspect of Malaysia. In the first part of the dissertation shall introduce the purpose of the research, the background on the Malaysian political economy, the importance of why the 1998-2016 period was specified in the research and the relevance of the three individuals in Malaysian politics. In the second part of the dissertation, it shall explore the literature in which shall discuss the question, the hypotheses and the methods that shall be employed to show the analytical output of the question.In the third part, the dissertation shall review the results from the methods employed. The dissertation shall conclude what the research has matched its hypotheses in answering the question.

BACKGROUND ON THE MALAYSIAN POLITICAL ECONOMY

This section shall explain the beginning of political events that leads to how it impacts the Malaysian economy. It is at the wake of the Asian Financial Crisis of 1997 that subsequently incited political events that are significantly affecting the socio-political balance in society and the economic means of the country. Malaysian politics is ethnically based with different political parties’ representation of the ethnic groups, nationalistic rooted and that economic prosperity leads to racial harmony. The United Malays National Organisation (UMNO) and its coalition Barisan Nasional has ruled Malaysia since independence in 1957 until today. UMNO is portrayed as the vanguard of Malay and Bumiputera rights in Malaysian politics; defending the interest of the Malays and Bumiputera, introducing the New Economic Policy (NEP) which created differential distribution of wealth among the population, ethnically. Its major influence in Malaysian politics created three pivotal individuals which are; Mahathir Mohammad, Anwar Ibrahim and Najib Razak that shall be explained in the subsequent chapters.

The Asian Financial Crisis in 1997 was the beginning for Malaysia’s economic instability as the crisis erupted a chain of socio-political events of foreign and domestic obstacles that are still relevant in modern Malaysia. Ultimately, Prime Minister, Mahathir Mohammad’s ability to repair the economy and winning the upcoming election in 1999 would be the testament of his political career and legacy (Milne and Mauzy, 1999). Mahathir’s eagerness in wanting to recover the economy led to his fight with the governor of Bank Negara (Central Bank of Malaysia) over the country’s financial policies (Ang and James,2007). The composite of the KLSE recorded that pre-crisis that 1200 points at its peak and plunged to below 250 points at its lowest in early 1998 (Abramov,2010). Domestic business was the biggest casualties duet to the meltdown of the stock market; created problematic for the Ringgit currency from the volume of non-performing loans which adherently threatened the collapse of the banking and financial industry in Malaysia. Economic disparities between the Bumiputera and non- Bumiputera owned companies further heightened tensions as it was reported between the period of the crisis, accumulating of 191 Bumiputera owned companies went bankrupt; failing to repay service debt in response to non-bumiputera owned companies (Gomez, 1999). In the aftermath of the crisis, the estimated amount that Malaysia lost about 140 billion (USD) at a time where the stock market evaluated the Ringgit.

The implications of the economic crisis created a political crisis as differences in repairing the economy that although it was critical for the government to expeditiously react to save companies, strengthening the confidence in the currency and the failure of which would result in massive unemployment rate for the country. Anwar Ibrahim, the Deputy Prime Minister and Finance Minister disagreed with Mahathir’s solution signifying there were biased in helping companies mainly Bumiputera owned inciting that Mahathir had business interests. Implicating that the Mahathir administration is full of cronyism, nepotism and corruption within UMNO and government. Anwar’s method in repairing the economy was in accordance with the International Monetary Fund (IMF) prescription for countries in the similar situations such as; introducing prudent fiscal policy such as restructuring the banking; mainly domestically based banks, open the market for competition mainly from foreign capital to flow in. However, Mahathir’s perspective differs from his deputy as welcoming foreign capital to the Malaysian market whereby it was in a weak state for Malaysian companies to enable a competitive edge subsequently affecting the populous further.

The Prime Minister opted for more drastic approaches to ensure that Malaysia’s economy recovers and survive. The approaches were; instead of opting borrowing from the IMF, Malaysia decided to borrow $1.35 billion from a consortium of twelve foreign banks operating in the country (Financial Times, December 30, 1998) as well as increasing the economic capabilities by cutting interest rates ferociously, imposing restrictions on currency trading and foreign stock investors enabling capital input and not outflow. The approaches taken became successful as it could be said that Malaysia managed to reap a surplus of RM 14 billion in the third quarter of 1998 B up 64.7% from the surplus of RM 8.5 billion posted in the second quarter of 1998 in their current account. It also saw an upward trend of foreign investors funds during the same period (Azrai and Zeufack 1999). Stablising the political economic environment and managing to overcome the crisis proved Mahathir’s ability as other trade statistics are encouraging, the long-run impact depends on how Malaysia makes the necessary changes in their financial system and other structural changes.

However, the point of deterioration in the relationship between the two was apparent as Mahathir forced his deputy to resign considering this crisis and their clash over economic policies and repairing the economy (Wain,2009). It is evident that by analysing and understanding the steps taken of how Malaysia overcome the financial crisis that it avertedly made a chain-reaction of political events that were to create further stabilization fears within Malaysia as Anwar retaliates against Mahathir.

CHAPTER 1: ANWAR IBRAHIM, REFORMASI AND THE NEW OPPOSITION

“A new dawn is breaking in Malaysia. Let us cleanse our beloved nation of the filth and garbage left behind by the conspirators. Let us rebuild a bright new Malaysia for our children”

(Anwar Ibrahim, 1998)

This chapter shall explore about Anwar Ibrahim, the former Deputy Prime Minister turned into the new Opposition leader. The former UMNO member that was through callings of “Reformasi” or reformation within the government; opting for Mahathir’s resignation and his influence within the Malaysian political sphere creating the first significant political event that impacted the country. Post-Asian Financial Crisis was marked with the calling for Mahathir’s resignation, which was led by his former deputy. The events in which unfolded which saw the growing support for Anwar among the Malays and former party compatriots that within UMNO itself saw a clear threat for Mahathir’s leadership. This riffled the political stability and Mahathir’s dominion over the Malay community. Influential as he was, Anwar once touted as the successor to the premiership realize that all is lost and retaliates with rallies and demonstration on the streets rallying different factions across the civilian and political sphere.

Anwar’s ability to conjure support and sympathy for his dismissal created political tensions that created damaged to the recovering economy. This is due to the political tensions caused a divide within the Bumiputera business community as it was the foremost time whereby a sitting Prime Minister was called to resign openly with such political scale. It was unpredictable how things would take shape. Previously, Mahathir was challenged but within UMNO party elections in 1987 that caused a similar division among the Malays that created political instability since its establishment. “Reformasi” (reformation movement), was the cry for criticizing Mahathir and the government over allegations of corruption, cronyism, and nepotism within the public realm. The contributing factor that saw major support was that the unfairness during the Mahathir’s era was that economically some were challenged with the notion not only policies such as NEP exist and the “Reformasis” of movement felt that under the Mahathir administration; it was a dictatorship that only those closely associated with the Prime Minister would be able for economic opportunities as industries within Malaysia were monopolized by them. “Reformasis” is a term for the individuals within the Gerakan Keadilan Rakyat or Gerak (Malaysian People’s Movement for Justice) (GGK) and Gagasan Demokrasi Rakyat or Gagasan (People’s Democracy Movement) (GPM) that the objectives of which were to oppose any action of Mahathir’s government and wanted reformation under Anwar’s directive through the political field (Suh S., and Oorjitham S., 1998).

On the night of his arrest in 1998, two things were clear; first it was the turning point in Malaysian politics, where it was where the makings of an opposition alliance that had formidable potential to challenge Barisan Nasional as the latter that more than ten thousand people had turned at his residence to listen to his speech criticizing Mahathir. Opposition parties came along with influential Non-Governmental Organizations (NGO) s in support of Anwar’s resistance to Mahathir that cut across the racial boundary. Malaysia was on the verge of political calamity when mass demonstration provoked violence occurred on the streets of Kuala Lumpur, the capital. The rallying among the public perception was based on the “Reformasi” campaign of political change indicating that the government needed to be more transparent with the public, and a fairer democratic system.

The demonstrations at the state capital imposed a threat to the economy, as SMEs (Small-Medium Enterprises) located in Kuala Lumpur were forced to close their business in avoidance to further negate losses that the movement had already affected. Confidence of the Malaysian market by foreign investors began to waver as the movement eclipses similarity that of during the demise of the Suharto regime of Indonesia.

Political opponents such as PAS (Parti Islam Se-Malaysia) and the DAP (Democratic Action Party) of the BN managed to capitalize the political opportunity in the form of Anwar Ibrahim with garnering support to end Mahathir’s reign within UMNO and the public; acknowledging that replacing with their coalition, BA (Barisan Alternatif) ultimately with the inclusion of Anwar’s newfound party; PKR (Parti Keadlian Rakyat) along with core members of the GGK and GPM.

Although, with an opposition coalition that was formidable to that of BN, it was unable to make real change that in the 1999 General Elections (GE); BN only lost 14 parliamentary seats as Mahathir’s ability to garner support from the public and a rapidly recovering economy that the only real threat that was available was Anwar but as he was sentenced so was BA losing their de facto leader and a change of winning. “Reformasis” were branded as politically motivated actors that would use methods towards the public but in turn spring boarding their own political agendas (Klein,2001).

A decade later in 2008, saw Anwar return to national politics winning the Permatang- Pauh by election of Penang, a parliamentary seat that won in a landslide. Movements made of the reflection of BA in the form of Pakatan Rakyat (PR) that would be spearheaded by himself within the elections as failure in 1999, 2004 and 2008 to overthrow the BN government had impacts as now as more than a third of the seats in parliament and several state governments. Anwar Ibrahim is a variable in Malaysian politics that is unpredictable that create dangers for the government and the economy. The risk of impact of political events that would mirror that of “Reformasi” would halt Malaysia’s progress causing stagnation in development.

CHAPTER 2: THE POST- MAHATHIR ERA, THE MALAY DIASPORA AND THE STATE

This chapter shall explore about the Post-Mahathir Era; the former Prime Minister at the helm in Malaysian politics through times of turbulence and preserve. It seems that during his time in power, it is shown Mahathir has growing increasingly autocratic. The Post- Mahathir Era bequeath upon many unforeseeable risk-fueled future that would affect Malaysia. Malaysia enjoyed economic prosperity knowing Mahathir was there, leading it. His replacement would need to invoke confidence of foreign investors, trust of corporation within the political and economic realm and ability to continue enabling developing the country. The highest risks are not only the state’s future under the new premier but a new President of UMNO whereby for the last two decades, a change occurs within the party. Consequently, it shows the end of Mahathir’s dictatorship style of governance and democratic transition can finally happen. In 2003, the 22-year reign of Mahathir Mohammad came to an end as he stepped down as Prime Minister. The immediate crisis was his replacement; as the problem that faces UMNO and the country is that Mahathir has ‘eliminated from the political scene just about any possible successor approaching the caliber of the best…’ that was Anwar Ibrahim (Milne and Mauzy, 1999). Anwar was the best candidate in which Mahathir had mentored to be Prime Minister since his inclusion within UMNO. While many within the party tend to be very sympathetic to the former Deputy Prime Minister. One of these is the leadership successor in the post Mahathir era: While the division also affect the non-Malays, argues that they are largely more supportive of Mahathir, the Chinese more so than the Indians. This is due to the fact that the Reformasi movement did not have the same effect to the Chinese as many prominent business owners among the Chinese community would back Mahathir (Jayasankaran ,1998).

For many Chinese, the experience of the similar Reformasi movement which had earlier took place in Indonesia and resulted in massive aggressions against ethnic Chinese was something they did not want to see repeated in Malaysia (Wong Chun Wai, 1998). The political events surrounding Anwar’s exclusion out of UMNO came with repercussions as it has divided the Malays into different factions that shaken the party’s unity. If UMNO was unable to unite under a leader, other component parties of the BN coalition like the Malayan Indian Congress (MIC) or the Malayan Chinese Association (MCA) that would need Malay support in the context of votes. It would need a leader that is accepted as not a renegade candidate such as Anwar if there is to be unification of all BN component parties. The candidate must be able to present BN’s ability to continue governing Malaysia and not fissure and dissolve the relationship with its voters as the main appeal to them is racial unity and provides a stable and tolerant government in a multiracial society.

Finding the replacement for someone whom has led Malaysia for almost half its history since independence in 1957, and the handover is a big change for a country where about 40% of the population were not even born when he came to power. Mahathir handed over power and the transition was to prevent a power struggle within the UMNO ranks, Mahathir appointed his successor, the more amiable Abdullah Ahmad Badawi, who promised reform but delivered little. Abdullah’s appointment was a gamble to many, particularly within UMNO as he is a non-confrontational individual, an Islamic advocate rather than a Malay backer and demeanour different from that of his predecessor. The first major test was the 2004 General Elections and solidifying that his premiership was not a fluke but a calculated risk as it was the largest win for BN in Malaysian history; winning 198 parliamentary seat. A two-third majority that enabled to form a government and evidently provided Abdullah for the justification in his premiership simulating the longest period of economic stability and growth. However, this was short-lived, as the 2008 General Elections proved that his time has ended. Unable to deliver promises and advocating to repeal acts such as the Internal Security Act (ISA) in which provided Mahathir successfulness to retain power dissolute the public’s faith in his leadership and government. BN suffered the largest lost in electoral history as losing the two-third majority within the Malaysian Parliament and five states to the opposition. Component parties; MIC and MCA suffered major losses as most of the Chinese population voted for PR in retaliation of existing “Mahathir-styled” policies (Gomez, 1999).

 In the aftermath of the 2008 GE, UMNO’s dominance within the Bumiputera and Malay-Muslim communities in Malaysia faces subsequent losses due to the election. An advantage of replacing the rhetoric of race with that of class is that all opposition parties can agree on the ideal of equality (Garrison ,1994). Religion is a more contentious matter as it revolves around the political and economic spectrum in which they inhabit. PAS has always been the advocate for Muslims and reconciliation between their Malay identity and their religious belief would divide the Islamists and the secularists.  The opportunity arose for PAS to uphold their beliefs and counter against UMNO’s influence within the Malay-Muslim community. It has demographically split the Malay preferential in political party whereby states of Kelantan, Terengganu, Kedah and Perlis which form UMNO’s core stronghold within the community swung in favor of PAS.  This phenomenon has not just changed the perspective of UMNO’s capabilities among the Malays but creates the “Malay diaspora” whereby divisional factions within the Malays were adamant and demonstrating towards the identification of religion than ethnicity.

The Malay capacity of understanding its own self leads further in Malay diaspora where by the lack of cultural and historical emphasis that was diminished by colonial powers left the Malays with a little amount of understanding and clinging onto Islam as their compass (Hilley,2001). The impending truth that political disruption caused by UMNO and PAS related are consequentially based upon stance on their religious view within Malaysian politics. These aspects are whereby on should Shariah be introduced? a PAS style way of Islamic governance? or Is UMNO even standing by its Islamic roots anymore?

The questions were dwell upon the reservation of the Malay diaspora that in its own ability, Malays are vulnerable to outside Islamic influences from other Islamic countries (Hilley 2001). The Malay diaspora further entraps a sense of identity to the Malays, it’s their determination of the sense of belonging than something other than that of their normal traditions. Evidently, the growing support for PAS is not unfounded but has showed its political upheaval for UMNO’s ability to represent for the Malays anymore as depicted in the electoral results. The increasing conservatism of Malaysian Islam probably rejected the notion of UMNO’s radicalization of “Ketuanan Melayu” or Malay rights were show forth in which to Muslims were against Islamic teachings of domination or superiority of another; whilst everyone is treated equal. The Malays’ Islamic interpretation enables them justifying the means in which the states act upon, the rules and regulation are basis upon Shariah Law with a mixture of civil law to be incorporated within a multiracial society (Norhasimah,1994).

CHAPTER 3: PRIME MINISTER, NAJIB RAZAK AND THE FUTURE OF MALAYSIA

The 2013 elections were the test for Najib Razak as he took over from Abdullah as Prime Minister. It was the fate of the dominant coalition Barisan Nasional. The previous election in 2008 saw that the government’s lost in five states as the 2013 GE proved a tougher challenge as Anwar Ibrahim leads the opposition coalition, Pakatan Rakyat. Polarisation of votes were the main attribute that affected voter turnout and subsequently enable any party to win dependence of the population (Powell, 1981) In the 2008 polls, the BN coalition lost its lost its two-thirds majority in parliament for the first time as now seeing it repeating in the 2013 General Elections as well. Opposition Leader, Anwar said irregularities and unpredictable swing cost him seats. “The results show a trend of polarisation which worries the government”

If it is not addressed, it can create tension or division in the country as the election proved once more that ethnic relations are important to understand the Malaysian Political Economy as the surrounding election issues were built upon the basis of a corrupted government, existing race-based policies that provided for the Malays and the stagnation on Malaysia’s economy. The estimated turnout for the election was 80% as the Election Commission states that in its first time in electoral seat that every seat was contested with a least two different parties. Although the opposition managed to win 89 seats, the incumbent Barisan Nasional managed to win the 133 of the 222 in parliamentary seats. This was viewed as the worst performance by BN in an election as popular vote fell to 47%. The public’s perception of Najib’s BN was apparent and the Prime Minister would survive this election. However, the major loss of BN was not taken easily by backbenchers and hardliners of the Barisan Nasional and within the conservative wing of UMNO.

Nevertheless, it was a win for the government but needing to fight back forces which cost his party’s seat that the government introduced a raft of initiatives privileging ethnic Malays.

The idea of empowering Bumiputera owned companies and individuals through the Bumiputera Economic Empowerment (BEE) programme. The estimated worth approaching $10 billion collected through Malaysia’s strongest industries shall only be benefited by only ethnic Malays and other indigenous peoples. This method reclaiming support within the urban factions of Malays and Bumiputera created further differences between the government and other ethnic groups. The capital collected shall be loaned out to Bumiputera owned enterprises that would create more entrepreneurs in the community. Theoretically, the BEE would enable further curbing of the unemployment rate and will require every government ministry to carve out contracts from big projects to award to bumiputera-owned businesses. In future state companies will have to establish targets for a higher volume of bumiputera participation. However, such initiatives although needed to provide the economic means of the population but normatively the government contracts are given to those who have financially- backed government politicians in a response of gratitude (Ashcraft ,1966).

The perspective in which brought upon the almost fatal defeat of BN is that of a “Chinese Tsunami” attributed to largest swing to the Opposition. Furthermore, efforts in garnering support targeting Chinese voters by Najib was redundant as the tiredness of the Chinese population treated as second-rate citizen were the primary causes of such reaction. There was also blatant attempt to please party critics who feel that the Prime Minister abandoned the Malays at the election and prioritise towards gathering Chinese voters (Muller,2014).

The BN led government consequently had positive news as the Malaysian markets react to stability continues under Najib as the Bursa Malaysia Index jumped 6.8% to a lifetime high of 1,808.90 in early trade whilst the local currency, the ringgit, hit a 10-month high reported by the Bursa Saham Malaysia (2013).

The main casualty of this failed strategy was Najib himself. Before the election, he had come to be a great perceived as reformer, winning the centre ground of politics. He repealed outdated security legislation and was slowly rolling back the system of ethnic preferences, begun in 1971.  A return to race-tinged policies represents a repudiation of much of what the head of UMNO and prime minister, Najib Razak, UMNO’s regression is a direct response to the election’s outcome would render in garnering Malay votes again due to the “Chinese tsunami”

However, the outcome of the election proved that the Malaysian people are further divided rather than unified. Attempts such as policy of 1Malaysia were futile as there is an imbalance of wealth among society and the tougher task at hand; if Najib was to reform aspects of the economic policies of his predecessor that has managed to create an economical and systemic racial-based policy that further divides the population into intra-ethnic tensions. In 2015 through 2016, Malaysia was faced with another issue that created political instability within another crisis that created further economic challenges for Malaysia in the form of the 1Malaysia Development Scandal whereby the allegations of money laundering instigated the United States of America’s Department of Justice whereby; Najib Razak was the primary suspect.  Within the domestic sphere, the Malaysian government was investigated as the purpose of 1MDB was to ensure future development for the country created further implications that cripple with instability to the governments. Opposition parties began staging demonstrations at the capital, Kuala Lumpur announcing the protest Prime Minister, Najib Razak and calling for his resignation. In UMNO, different factions were distraught to believe which side whereby allegiance to the President of the party was absolute.

The 1MDB Scandal led to UMNO’s internal strife between members that wanted Najib to resign in response the economic implications that the government has the population undergoing with newer taxation laws and higher costs of living. The scandal created problematic within foreign investor’s trust towards Malaysian financial institution that struggled to be clean from any signatures of misuse of power and political influences that disrupts the economic stability (Pua,2015).

The future of Malaysia is in disparity as the political event that was the 1MDB Scandal brought upon the foundations of the Malaysian economy. This is creating further damages to the progress of the country, the strength of its industries and the ability of the RM to compete in the global market.

The political events timeline indicator 1998-2016 (18 years span):

FIGURE A

FIGURE   B

Figures A and B shows the specific period in which the dissertation is based upon starts from the year 1998 whereby the beginning of political events impacting the economy creating fluctuations. The political events timelines are as follow and accordance with the period from 1998-2016.

1998- When Anwar was jailed, the rallies and demonstration of the “reformasi” movement in which his supporters assembled in the streets and demanded the resignation of Mahathir.

1999- However, Mahathir was quick to indicate that he would not resign until the economy had been restored to its pre-crisis condition. Arresting Anwar and recovering the Malaysian economy

2000-2002 – The recovering economy enables precautionary steps into Mahathir’s stepping down from power; enabling a smooth transition after previous years of political calamity that has affected the economy.

2003- Perhaps, Abdullah’s stance as a new candidate of the premiership is further attributed to the outcome of political turbulence in Malaysian politics. In sum, it was clear that despite the disruption to economic growth, the system thus far has been able to absorb most of its difficult challenges resulting from the twin crises. Nevertheless, the growth is still instrumental for the continuing wealth redistribution exercise to redress imbalances in the society, both in terms of ethnic groups and between the various regions in the country. Consequently, it would significantly affect various government policies, including the nation-building project

2004- The election provided the platform of a new Prime Minister that is seen democratic and projects of nation formation will very much depend on the state of the economy and the type of government at his helm. Economic affluence is not only important for political mileage for Abdullah but enable wealth redistribution programs, but also important to diffuse ethnic conflict. Ethnic roles have been downplayed in the aftermath of the election that BN is able to unify all races within the government and society.

2008- However, is it parading its democratic credentials, UMNO tactics proved that it is still is formal self-opting for the ethnicity in the Malay and Bumiputera communities. It was not a favourable election for the BN coalition as it lost five states to the opposition, with internal party strife under Abdullah’s Leadership. The BN coalition faced its toughest challenge to date to unify Malaysian public while not crossing ethnic boundaries.

2013-2016 – Yet what might be satisfying for UMNO could prove the reverse for Malaysia. For what has emerged during the electoral process that showed weakness within the party.

Leaders within it’s the party faced unprecedented collateral damages from Najib’s involvement of 1MDB. There are different factions within BN that are  determined to shift the party in a traditionalist, indeed reactionary, direction of trying to oust Najib.  They want to reassert the supremacy of ethnic Malays and the UMNO was formed to represent these and other “indigenous” groups who make up a majority in this multiracial country. To enable total control of Malaysia’s political actors.

HYPOTHESES

Assessing the impact of how political events create macroeconomic fluctuations in Malaysia. The specific purpose of this research is to search out effect of political events on the Bursa Saham Malaysia (the Malaysian stock market), the index of industrial production and the exchange rate from Ringgit Malaysia (RM) to Great British Pound (GBP) from the period of 1998-2016, and an 18-year period. This research is considering stock market to get an understanding that how it performs in case of political instability in Malaysia. This paper proposes to illustrate the significant relation of how the impact of political events creates macroeconomic fluctuations in Malaysia. It is essential that before further taking steps into progress, revaluation of the methods, environment and aspects that enables the formulating of successive process for the country.

LITERATURE REVIEW

In the literature review, rises different key question about the Malaysian political system that has seen symbiotic with the ideas of ethnic ideologies of a nation, the combination of differential abundance of political actors. It has the contributing to this image of the nation as the theme of nationalism is deviate of each other and different in the uniqueness of community groups that are informally laying its political struggles whether they are; Malays, Indians or Chinese. It is mentioned by Clive J. Christie (1998) that the heart of any discussion of nationhood entrails that of nationalism and the structure of identity as the notion of what is to be Malaysian is about? The historical emphasis of political struggles deviate from all parts of the world that make the idea of what the struggle whereby neighbouring Malaysia, in the isles of Indonesia lies East Timor; adamant of being its own independent country yet bounded by the the socio-political salience of ethnicity and nationalism have sent shock waves to the world communities. The politics of identity in Malaysia illustrates the prevailing contradictions of various notions of nation-of-intent2 both inter and intra ethnic groups (Shamsul AB, 1993). According to the United Nations report released in 1993, since the second world war there were 127 conflicts which had occurred world-wide that led to the outbreak of wars. In the literature of conflicts, it has founded that are linked with ethnic confrontations on the similar level of understanding between human beings (Goh ,1993). For Malaysia, nation-building has been the single most crucial national agenda since its inception as a sovereign state in 1957. Governance within the literature suggest that almost all key national policies devised since then have a direct bearing on the question of nation-building (Rahim,1996). Nevertheless, in as much as these policies were hoped to redress the related problems of national integration, new challenges cropped up, and some emerged with even more delicate issues.

The dissertation exemplifies its basis of the research of the suitable variables in which would create the best outcome of the research. and hypotheses of two cases studies of Pakistan and Greece on how economics and politics affect the surrounding public domain.

Khattak, (2009) estimate the effects of social and political factors on the inflow of Foreign Direct Investment (FDI) within Pakistan. Dimitrios and Siriopoulos (2000) investigate the relationship between stock market development, political instability and economic growth in Greece. They measure socio political instability with using time series data and construct an index that captures various phenomena of political violence. The study found that there is strong relationship between uncertain socio political conditions and the general index of Athens Stock Exchange (ASE). The study concludes that uncertain socio political conditions negatively affect economic growth in case of Greek.  Ahmad and G. R guru (2010) investigate the impacts of political instability on financial market by using data for period January 1999 to September 2006 from Pakistan. It is to note that Pakistan and Greece share similarities with Malaysia in many ways such as Pakistan and Malaysia are both; Islamic nations while the shared similarity with Greece is that its economic ability is stagnating unable for it to progress due to the political aspects of the country.

Secondary data over the period from 1971 to 2005 have been used.  He used the techniques simple semi log linear regression model and the method of least square for estimation which have been applied. This study found a positive and statistically significant relationship between human capital and FDI inflow. The result of political instability indicates though an inverse relationship with FDI but insignificant. Shahbaz (2007) analyzed whether there exist a relationship economic growth between and development of stock market in case of less developed countries like Pakistan that the findings suggested that there was a long-run relationship between stock market development and economic growth for Pakistan.

They use high frequency data from the indicators (exchange rate, stock prices) of financial market on daily observation to perform empirical estimation.  Granger causality test and Markov switching VAR model is used for estimation. The study concludes that political shocks having impact on currency market and impact on stock prices leading to slow down the economy.  Shamail Arzoo (2011) examines the relationship between aggregate stock market trading volume and daily stock returns. This paper also identifies instability in stock market and fluctuations in stock returns due to the political events. Political events within the study shows how Pakistan mechanism of coping with political events that have negative impacts leading towards reforming itself through other variables (Shaabaz) The result of this study shows that stock returns moved too much due to change in the trading volume. Ratanapakon and Sharma (2007) investigate a positive relationship between inflation and stock prices. On the other hand, Humpe and Macmillan (2009) reported a negative relationship of inflation and stock prices. Jakob and Siermanna (1996) investigate that turnover rate of central bank governors and political instability affects the rate of inflation.  Martin paldam (1987) investigates the relationship between inflation and political instability in Latin America from 1946-1987. The study founds a highly significant connection between the frequency of military government and the level of inflation. He concludes that the military regimes are relatively unstable ones and the military regimes are relatively strong in fighting inflation.

If the trend continues, as noted by Jayasankaran (1999), the Bumiputera-non-Bumiputera economic gap in the future of the state that would create anomisty between ethnic groups subsequently the usage of violence is available. Inter-ethnic conflicts would further have perplexed the race-relations within states and exposing weaknesses of each other.

Inevitably, this would affect the project of nation-building in the country. The economic crisis has clearly indicated that the NEP-created Bumiputera’s companies were akin to be crushed my other countries (Shamsul A.B., 1998).

METHODOLOGY

In this dissertation to that the methodology in which would be best to test the hypotheses that political events create macroeconomic fluctuation in Malaysia. The VAR model is also commonly used for analyzing the active impact of different types of random instability on systems of variables such as the monetary transmission mechanism.  However, it shall be applied by the dissertation to assess the impact of how political events create macroeconomic fluctuations in Malaysia. It was discovered by Sims (1980) that is being used widely within the scope of macroeconomic modelling. Vector Auto Regression is a system whereby that every equation has the same right- hand variables and that variables contain lagged values of all the endogenous variables which according to Hall (1996). A specific observed time series is needed to forecast economic variables and have proven successful for forecasting systems of interconnected time series variables (Hall et al., 1996) that VAR models would need. The time series data for this VAR model in which shall be applied is from the year 1998-2016, spanning over an 18-year period to enable whether the hypotheses would be correct or null.

Subsequently after testing the VAR model with the variables, the dissertation shall analyse VAR model using Impulse response analysis in reliance of the direct response that political events have upon with the interaction with the variable. Secondly, the dissertation shall also analyse VAR model Variance decomposition analysis and lastly an inverse roots of AR analysis to show the stability of the model according to the variables chosen.

EXPLANATION OF FORMULA

The basic equation of the VAR is:

Mx=B1  Mx-1+… + Bz  Mx-N+Fu+εx

Where

Mxis a vector of endogenous variables, is a

Fuvector of exogenous variables, B1,

…Bz and F are matrices of coefficients to be estimated, and

εxis a vector of innovations that are correlated with each other but uncorrelated with their own lagged values and uncorrelated with

Mx-1through

Mx-Nand

Fu.

DESCRIPTION OF VARIABLES

STCK_MRKT = Stock Market /Bursa Saham Malaysia/ Kuala Lumpur Stock Exchange

EXCHANGE   = The exchange rate from Ringgit Malaysia (RM) to Great British Pound (GBP)

PRDC_INDX = The index of industrial production

POLITICAL EVENTS = Political events occurrence from 1998-2016. An 18-year period.

ANALYSIS

Dependent Variable: STCK_MRKT    
Method: Least Squares    
Date: 04/21/17   Time: 16:46    
Sample: 1998M01 2016M12    
Included observations: 228    
         
Variable Coefficient Std. Error t-Statistic Prob.
         
EXCHANGE 5437.597 520.4280 10.44832 0.0000
PRDC_INDX 13.50239 0.428707 31.49559 0.0000
POLITICAL_EVENTS -27.88444 25.77797 -1.081716 0.2805
C -1497.986 91.24731 -16.41677 0.0000
         
R-squared 0.863807     Mean dependent var 1150.198
Adjusted R-squared 0.861983     S.D. dependent var 431.7170
S.E. of regression 160.3855     Akaike info criterion 13.01043
Sum squared resid 5762069.     Schwarz criterion 13.07059
Log likelihood -1479.189     Hannan-Quinn criter. 13.03470
F-statistic 473.5755     Durbin-Watson stat 0.337403
Prob(F-statistic) 0.000000      

Figure 1

Dependent Variable: PRDC_INDX    
Method: Least Squares    
Date: 04/21/17   Time: 16:47    
Sample: 1998M01 2016M12    
Included observations: 228    
         
         
Variable Coefficient Std. Error t-Statistic Prob.
         
         
STCK_MRKT 0.060418 0.001918 31.49559 0.0000
EXCHANGE -264.0273 38.61807 -6.836885 0.0000
POLITICAL_EVENTS -3.336331 1.714419 1.946042 0.0529
C 102.3919 5.939450 17.23929 0.0000
         
         
R-squared 0.834491     Mean dependent var 127.0194
Adjusted R-squared 0.832274     S.D. dependent var 26.19647
S.E. of regression 10.72859     Akaike info criterion 7.601089
Sum squared resid 25782.98     Schwarz criterion 7.661253
Log likelihood -862.5241     Hannan-Quinn criter. 7.625363
F-statistic 376.4668     Durbin-Watson stat 0.391158
Prob(F-statistic) 0.000000      

Figure 2

Figure 3

VARIANCE DECOMPOSITION OF VARIABLES DUE TO SHOCKS ON POLITICAL EVENTS AT 12 MONTH:
           
 Variance Decomposition of EXCHANGE: 2.129592  
 Variance Decomposition of PRDC_INDX: 0.936985  
 Variance Decomposition of STCK_MRKT: 6.840409  

Figure 4

FIGURE 5

RESULTS

The results of the analysis are showed as in the previous pages in the dissertation whereby Figure 1 shows that how the stock market acted negatively in response to political events. It has a negative impact towards the stock market as its significant is greater. The results of the analysis are showed as in the previous pages in the dissertation whereby Figure 2 shows that how the index of industrial production is impacted negatively in response to political event as it is significantly greater. In the first figure within Figure 3, it can be shown that by employing the VAR model. The VAR model using Impulse response analysis in reliance of the direct response that political events impacted negatively towards the stock market strongly that the stock market reacted with a quick response to the political events. In the second figure within Figure 3, it can be shown that by employing the VAR model. The VAR model using Impulse response analysis in reliance of the direct response that political events impacted negatively towards the index of industrial product but took longer to react towards the political events. In the third figure within Figure 3, it can be shown that by employing the VAR model. The VAR model using Impulse response analysis in reliance of the direct response that political events impacted negatively towards the exchange rate, that the exchange rate reacted rapidly responsive to the political events. In Figure 4, it can be shown that by employing the VAR model. With the analysis of the VAR model Variance decomposition analysis shows which variable that is most affected by the political events as exchange rate was affected negatively by the political events rather than the index of industrial production and the stock market. In Figure 5, an inverse roots of AR analysis of the stability of the model according to the variables chosen and as all the variables retain within the circumference reinforces the variables chosen to fully answer the question that political events impact Malaysia’s economy that it creates macroeconomic fluctuation.

CONCLUSION

It is evident political events create macroeconomic fluctuations in Malaysia. The dissertation has looked upon the variation of variables that might create macroeconomic fluctuations but political events are synonymous within the Malaysian political economy and it has negative implications for the future of Malaysia. We have seen in the dissertation that within the past decade, there have been government plans that did not bear fruit as political events caused the economic stability in which creates fluctuation delaying progress. The quest on becoming a unified nation separation of race or even party politics that is as hard to to imagine what would follow if there was an abrupt. change of government in the next election, as Malaysia had never experienced this at the Federal level since achieving independence in 1957. Each chapter provided the emphasis in understanding the deeper implications of Malaysian politics that are unable to be devoided from one another. It is that when the ability of the population, together fuelling for a unified vision of Malaysia, that programs such as TN50 or Wawasan 2020 could be achieve relatively easy. The progressive element of the political events enable the research on the assessment of how political events create macroeconomic fluctuations in Malaysia.

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Data Sets; (Time series)

Central Bank of Malaysia http://www.bnm.gov.my/

Department of Statistic Malaysia https://www.dosm.gov.my/v1/

Ministry of Finance Malaysia http://www.treasury.gov.my/index.php/en/

*Picture by Lat,June 2013.

APPENDICES

APPENDIX A

APPENDIX B

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