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Malaysia’s prime minister outlined a bold plan to modernize the Asian nation’s economy on Tuesday, addressing a corrupt and flawed system that many economists blame for holding back the country’s growth. In a speech in Kuala Lumpur to kick off the “New Economic Model,” prime minister Majib Razak said the entrenched affirmative action policies, which have historically benefited primarily the majority ethnic Malay population, will be adjusted to help disadvantaged members of the minority ethnic groups. Speaking about the plan to eradicate the corruption that has hampered economic growth in the past, Razak noted that it “must be market friendly, it must be merit-based, it must be transparent, and it must be needs-based.”

“Many critics say the affirmative action program, known as the New Economic Policy, has hindered Malaysia’s competitiveness in recent years,” writes James Hookway. “The U.S. and European Union have singled out Malaysia’s insistence on maintaining preferences for ethnic-Malay owned businesses in government procurement contracts for stalling the development of free-trade pacts.” The plan looks to create stiff political opposition from many in Najib’s own party who will face pressure from the 60% Malay population ahead of elections in 2013. Nevertheless, Najib is looking to push ahead with the reforms. “We must recognize that some policies, which served a purpose in a previous era, may now be impediments to success,” Najib said.

Kuala Lumpur, the capital of Malaysia

This policy looks to further help Malaysia reach its goal of ‘Wawasan 2020′ in which the country hopes to be recognized as a developed nation by the year 2020. Najib feels that this plan will help spur economic development, get the growth rate back up to 8% and get national incomes up from a current level of $7,000 to more than $17,000 by the end of the decade. The ambitious plan definitely needed a jump-start in order to remain viable since Malaysia only grew at a rate of roughly 5.4% in the 2000’s. Najib hopes that any negative political consequences of this move will be more than offset by the increased economic growth and rising incomes that could come from this policy shift.

Inside the Malaysia ETF

The iShares MSCI Malaysia Index Fund (NYSEARCA:EWM) tracks the performance of the MSCI Malaysia Index, a benchmark that includes about 45 of the largest publicly-traded companies in Malaysia. Reflecting the makeup of the Malaysian economy, EWM is heaviest in the financial and industrial sectors and gives almost no weight to energy and materials companies. EWM has been one of the top-performing international ETFs in 2010, surging nearly 10% in the first quarter after bullish outlooks from some Wall Street banks (see What’s Driving The Malaysia ETF?)

EWM

Disclosure: No positions at time of writing.

Source: Eye on Malaysia ETF as Overhaul Plans Swirl