From Asian Wall Street Journal, 27th March 2000

HONG KONG -- Is UMNO going the way of the KMT? Malaysia's former Finance Minister Razaleigh Hamzah seems to think so. He warned over the weekend that if his country's dominant political party, United Malays National Organization, isn't careful, it could be humbled just like Taiwan's Kuomintang, Indonesia's Golkar Party and Japan's Liberal Democratic Party. Opposition politician Lim Kit Siang even suggested that the vote in Taiwan overturning 50 years of KMT rule foreshadowed "the real beginning of the end of UMNO."

Sage advice or politically motivated hyperbole? Certainly, UMNO is no Golkar and Malaysian Prime Minister Mahathir Mohamad is no Suharto. But the question is worth asking, if only because the past two years have seen a very real backlash in Asia against regimes in which leaders use their position to enrich themselves and their supporters.

Most recently, voters in Taiwan turned their backs on the ruling KMT after 50 years in part because of disgust with "black gold" politics.Often referred to as the richest party in the world, the KMT holds an estimated $5 billion in assets and earns more than $300 million in profits annually. Aside from bringing in spending money, the KMT's business interests also brought it a great deal of control over society. While UMNO cannot claim to be quite so entrepreneurial, it has developed its own style of "black gold" politics, to the detriment of the majority of Malaysians.

In its 42 years of uninterrupted rule, and building on a system left behind by former colonial masters, UMNO has built up a vast system of political patronage. At the center is the state-owned oil and gas company, Petronas, which has taken on the role of knight in shining armor to troubled state companies. For instance, Petronas repeatedly bailed out the state bank, Bank Bumiputra, which was in turn a central part of the state's affirmative action program for favored Malay capitalists. Not surprisingly, the bailouts have only worsened the problem of imprudent and politically correct lending. More recently, in August 1997, Petronas bought a controlling stake in Malaysian International Shipping Corporation, which later purchased the shipping assets of an indebted firm belonging to Dr. Mahathir's eldest son.

Dr. Mahathir's government came under fire, both at home and abroad, when the state-owned Corporate Debt Restructuring Committee pulled together a bailout for the well-connected and heavily indebted Renong conglomerate. Indeed, bailing out loss-making enterprises has become the norm under the UMNO-led National Front coalition-provided they are the right enterprises. Meanwhile, although public money is behind the bailouts, the public has virtually no voice in approving or disapproving them. Petronas's accounts, for example, do not go before Parliament.

If there is a primary distinction to be made between UMNO and a party like the KMT, it is that UMNO does not use its position so much to enrich itself and its officers directly, but to prop up its supporters. For those who end up paying the tab, however - the Malaysian taxpayers - this is a distinction without a difference. The resulting waste and unfairness can only result in growing resentment among those not getting a piece of UMNO's largesse. While such resentment may not amount to much in boom times, during a downturn it can be enough to bring about revolutionary political changes, as we have already seen elsewhere in Asia.

Quite apart from the economic havoc wreaked by Malaysia's policy of economic favoritism, it may also bear within it the seeds of the ruling party's own downfall. Dr. Mahathir might heed the warnings of his former finance minister and Mr. Lim, and look for ways to unravel the ties between his party and the nation's businesses - before they are unraveled for him.