Among all of the developing countries in the
world, Malaysia is often held up as one of the
few countries whose economic policies might
be worth emulating. 1 Mainstream economists
suggest that liberal economic policy decisions
on the part of Malaysia’s ruling elite spurred
foreign direct investment, drove technological
deepening, sidestepped resource abundance
traps, and facilitated specialization, comparative
advantage, and overall growth. 2 Most
importantly, such policies acted to restructure
and reallocate existing resources into new combinations
of labor, capital, and technology in
ways that at least did not derail and most likely
facilitated FDI-led growth. 3
Yet as many political economists more familiar
with southeast Asia know, this attention
to liberalization and economic reform as the
drivers behind economic growth veils the
way coalitional politics drove illiberal government
intervention to address ethnically based
economic inequality, create national heavy
industries, and favor politically well-connected
entrepreneurs. Equally important, it conflates
outcomes of economic growth, or raw wealth
creation, with economic upgrading, the process
of moving to ever-higher levels of innovation
and value-added in the production process. A
more nuanced analysis reveals that coalitional
bargaining resulted in a complex mix of liberal
and illiberal economic policies that resembles
other developing countries. But unlike in other
developing countries, the logic behind the coalitional
bargain was not to permit illiberal intervention
and protection in one arena to gain or
maintain support for liberal reform in another. 4
Instead, the logic was inverted: maintaining and
expanding trade and investment liberalization
generated the growth that financed costly redistributive
intervention and indirectly compensated
the Chinese business interests on whom
the bulk of these redistributive measures fell. A
liberal, primary-commodity, export-oriented
economy was reshaped into a dual economy—
where efficient, multinational corporations
manufactured for export in tariff-free exportprocessing
zones alongside protected